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Carbon-Intensive Investors Risk $6 Trillion ‘Bubble,’ Study Says

By Sally Bakewell – Apr 18, 2013 4:01 PM PT Investors in carbon-intensive business could see $6 trillion wasted as policies limiting global warming stop them from exploiting their coal, oil and gas reserves, according to a report. The top 200 oil, gas and mining companies spent $674 billion last year finding and developing fossil fuel resources, according […]

States’ Group Calls for 45% Cut in Amount of Carbon Emissions Allowed

By FELICITY BARRINGER The regional group proposed a 45 percent reduction next year in the total carbon dioxide emissions allowed. The cut is not as draconian as that number suggests, however, because the new total of 91 million tons reflects the current emissions level after five years of a slumping economy and increases in renewable energy […]

The Triumph (and Challenge) of Climate Math

HarvardBusiness.org

By Andrew Winston – Nov 19, 2012 11:27 AM MT

A nerd hasn’t been this popular since, well, ever. Nate Silver, the creator of the election poll statistical hub FiveThirtyEight was declared the clear winner in the presidential election. And on Fox News, election math was at the center of one of the most bizarre on-air moments in memory.

The numbers discussion then seeped over from polls to other politically charged topics such as climate change. David Frum, President George W. Bush’s speechwriter, tweeted this gem: “Horrible possibility: if the geeks are right about Ohio, might they also be right about climate?”

Saudi Arabia’s plans to invest $109 billion in its solar industry over 20 years. Photographer: Art Partner Images

This awakening about the math (and physics) of climate change has coincided with climate activist Bill McKibben’s “Do the Math” tour, an awareness-raising series of events criss-crossing the country this month. The tour was inspired by McKibben’s incredible essay in Rolling Stone magazine, “Global Warming’s Terrifying New Math.”

In this article, McKibben lays out 3 fundamental climate numbers: to stay below (1) 2°C of warming (the limit the world’s scientists have said might help us avoid the worst of climate change), we can only burn (2) 565 more gigatons (a billion tons) of carbon dioxide, which will force a battle with the fossil fuel industry since it has (3) 2,795 gigatons in reserve. These are important numbers to wrap your head around, but what do they really mean for countries and companies? How fast do we have to change?

To answer these tough questions, we can turn to two of the world’s best number crunchers, McKinsey and PwC (full disclosure: I have a consulting partnership arrangement with PwC US). Last week PwC released its Low Carbon Economy Index 2012 report, which calculated one simple, powerful number: In order to meet the 2°C warming target, we will need to reduce the global carbon intensity (how much carbon it takes to produce every unit of energy or GDP) by 5.1% every year until 2050. For perspective, in 2011 carbon intensity improved just 0.8%.

This number provided another view on some similar math from McKinsey, which concluded that the ratio of global GDP per ton of CO2 would need to rise tenfold by 2050.

OK, so the math is not pretty, but it is what it is. And it’s not like the world is ignoring the challenge entirely. Here are some numbers that make me feel better:

  • $2.2 trillion: The size of the “climate economy” by 2020 according to the bank HSBC
  • $372 billion: China’s budget for energy conservation and anti-pollution measures over the next few years
  • $260 billion: Global clean energy investment in 2011
  • $109 billion: Saudi Arabia’s planned investment in its solar industry over 20 years
  • 50%: the portion of Germany’s entire electric demand satisfied by solar energy during one sunny day in May, a world record

These are great macro stats. But the brutal logic of the McKibben, PwC, and McKinsey numbers applies at the microeconomic level as well. Meaning, I believe, companies need to acknowledge the math and shoot for a 5% reduction in carbon per year.

It’s not so crazy. The early leaders have a good start. Dow Chemical has reduced energy costs $9 billion since 1994. Walmart has improved the fuel efficiency of its distribution fleet by 69% since 2005. A large consumer products company — which tells me it will be going public with this story very soon — has already cut carbon in its own operations by 80%.

Of course, the entire private sector will not achieve these results on its own. We will need strong global policies and a price on carbon. But given how profitable many organizations are finding the low carbon quest to be, they shouldn’t wait.

While it’s a myth that companies make all decisions on ROI calculations (what was the exact return on that Super Bowl ad?), we do claim to love hard-nosed numbers. Let’s not let politics or fear of the size of the task ahead get in the way of today’s climate math.

Climate data has trumped politics in the past. According to Sunday’s op-ed by Cass Sunstein, the Harvard professor and co-author of the great book Nudge, Ronald Reagan embraced aggressive action to solve the problem of ozone depletion because he believed the cost-benefit analysis. Basically, it was cheaper to act than not to. Similarly, the math on climate action is getting better every day as the costs of inaction rise. As Sunstein points out, Hurricane Sandy will likely cost the country $50 billion (New York’s Governor Cuomo has already asked for $35 billion in federal aid).

Climate math is simply a constraint on the imaginary formula that is business as usual. But constraints drive innovation. We in the business community respect numbers and the best companies love challenges. Let’s prove it.

Andrew Winston is the co-author of the best-seller Green to Gold and the author of Green Recovery. He advises some of the world’s biggest companies on environmental strategy. Follow him on Twitter at @AndrewWinston.

Copyright © 2010 Harvard Business School Publishing. All rights reserved. Harvard Business Publishing is an affiliate of Harvard Business School.

California stages successful cap-and-trade trial

California officials have completed a successful trial of its much-anticipated carbon trading scheme, which will be launched in November in an attempt to put a price on emissions from industrial facilities and power plants.

The state’s Air Resources Board staged a mock greenhouse gas auction late last week, in which heavy emitting companies pretended to bid for carbon permits in order to test out the system ahead of its official launch.

California will roll out the platform for real on Nov. 14, when more than 400 companies will be able to buy and sell tradeable carbon credits through quarterly auctions.

A statewide cap on carbon emissions will then be imposed from 2013, before being gradually lowered year-on-year, providing firms with a financial incentive to curb their greenhouse gas emissions.

Under the scheme, which is largely modeled on the EU’s emissions trading scheme, companies will have to hold carbon allowances to cover their own emissions, forcing them to purchase additional emissions if they exceed their cap.

In the first year of the scheme the board plans to give away the vast majority of credits, auctioning just 10 percent in order to put a price on carbon.

However, the amount of free carbon permits will be reduced each year so by 2020, 50 percent of allowances will be auctioned, providing a clear price signal for firms to invest in low emission technologies.

According to local reports, Air Resources Board board officials said the dress rehearsal ran smoothly, buoying hopes that the November launch will be a success.

Around 150 companies submitted bids during the simulation, although the agency did not release any pricing numbers or trading volumes, and no money changed hands.

However, the Board is still facing pressure from politicians to give away all of the credits for free, over fears the cap-and-trade scheme will have a negative impact on businesses and result in higher energy bills.

Assemblymember Henry T. Perea and Senator Michael J. Rubio have argued that the state can achieve its carbon reduction goals without conducting allowance auctions.

Down to the wire, cap-and-trade carbon market is unpopular with California’s manufacturers, refiners, some businesses

By Molly Peterson | September 20th, 2012, 12:14pm

Tesoro

AB 32’s carbon reduction goals will apply to manufacturers, and refiners like Tesoro in Wilmington.

Manufacturers, oil refiners, and other business groups really, really, really don’t want the state of California to cap carbon emissions and enable trading for them, a carbon market the state intends to establish in just a couple of months.

The idea of such a market is to cap carbon pollution and then reduce the amount of it California’s market participants send into the air. Some businesses can’t (or won’t) change their carbon-producing ways; in which case, they will be able to buy credits from other businesses that can. The state plans to auction 61 million credits in mid-November, and recently tested the market function to make sure it would go smoothly.

Today they’re taking their one last shot at the California Air Resources Board, using the public comment at a run-of-the-mill hearing to call attention to what they want.According to the Sacramento Bee’s Dale Kasler:

“It’s our last chance to really comment on this thing before they go forward with the auction,” said Gino DiCaro, spokesman for the California Manufacturers and Technology Association.

As for what they want? A lighter load, at the most basic level. They want no capping and trading, unless they want the rules to be rewritten, unless they want free carbon allowances rather than ones they’d pay for at auction.

In a letter dated September 7, the California League of Food Processors, the California Chamber of Commerce, the California Manufacturers and Technology Association, and the California Business Roundtable wrote to Governor Jerry Brown:

…[T]he cap and trade auction now being implemented by the Air Resources Board goes far beyond that, imposing an additional multi?billion dollar energy tax on consumers and businesses – but doing nothing to further the goals of AB 32…We must ensure that this auction does not raise billions of dollars in new taxes on the backs of California businesses and consumers and does not kill jobs or damage our fragile economic recovery.

The letter goes on to essentially ask for all allowances to be freely distributed (a move, incidentally, which has crippled the European market). But it’s a good strategy: public letters like this have sometimes yielded a political benefit: many of the carbon credits that will populate the initial market are free, for example, after years of intense lobbying and lawsuits.

AB 32 has been law since 2006; these groups have fought it tooth and nail every step of the way; these last-minute appeals aren’t surprising. What would surprise environmental groups watching the final two months before the auction would be if business groups squeezed more out of the Air Resources Board.

California Asks Court to Reinstate Carbon Fuel Standard

By Karen Gullo – Oct 16, 2012 12:45 PM MT

Daniel Acker/Bloomberg
Ethanol production at the Great River Energy Blue Flint Ethanol plant in Underwood, North Dakota. Fuel sales generate credits or deficits for companies, depending on the carbon intensity of their product.

California’s low-carbon fuel standard, which complements the state’s first-in-the-nation economy-wide cap and trade program, appears to favor in-state fuel producers over Midwest ethanol makers, two U.S. appeals court judges said.

Two members of a three-judge panel questioned state lawyers today about why the standard is tougher on ethanol produced in the Midwest and whether California’s method of assessing a higher “carbon-intensity” for Midwest ethanol because of the energy expended to make and then transport it to California was unfair to out of state producers.

“Producers have no control over that,” U.S. Circuit Judge Dorothy Nelson said at a hearing in San Francisco. “Isn’t that the equivalent of discriminating?”

California’s low carbon fuel standard and other elements of its cap and trade program are facing court challenges as the state gets ready to hold its first auction of carbon allowances next month. The State Air Resources Board on Nov. 14 will auction at least 21.8 million allowances to be used during the first compliance phase of the cap-and-trade program.

Attorneys for the board, which monitors air quality and administers the standard, asked the appeals court panel today to reverse a judge’s ruling that struck down portions of carbon fuel standards on grounds that they’re unfair to out-of-state ethanol producers and illegally regulate businesses outside of California.

Carbon Intensity

The standards assign a higher so-called carbon intensity score to ethanol produced in the Midwest. The higher score for Midwest ethanol is science-based and fair, because while the fuel is chemically and physically identical to ethanol produced in California, corn farming, transportation and processing produces more emissions, California officials say.

Ethanol producers challenging the standard are trying to “prevent California from following sound science,” Deputy Attorney General Elaine Meckenstock told the judges today. The standard “controls only the carbon intensity of the fuels sold in California” and is neutral about where the fuel is produced.

She defended the state’s method of using a “life cycle analysis” that considers pollution caused by transportation and manufacturing to assign a carbon intensity to fuel.

“It’s not true that there’s nothing a producer can do to lower” emissions from production and shipping, she told the justices.

Elements of the standard “arguably adversely affect ethanol produced in the Midwest,” U.S. Circuit Judge Mary Murguia said today.

Temporary Reinstatement

Farm and oil-industry groups sued the state last year to overturn the standards. After they won a judge’s ruling in December, the standards were temporarily reinstated by the federal appeals court, which heard arguments today from both sides. The justices didn’t say when they would rule.

California’s carbon standards apply to any company that sells transportation fuel in the state and requires a 10 percent average reduction in carbon intensity by 2020.

Fuel sales generate credits or deficits for companies, depending on the carbon intensity of their product. Companies subject to the carbon regulations can use credits to comply with standards or sell them to other companies, and those with deficits must purchase credits to meet standards.

U.S. District Judge Lawrence O’Neill in Fresno, California, ruled Dec. 29 that California’s method of assigning a higher score to ethanol produced out of state violates interstate commerce laws.

Competitive Disadvantage

The standard “puts you at a greater competitive disadvantage the farther you are from California,” said Peter Keisler, an attorney for petrochemical makers. “Everything is better under this system if it’s in California.”

Midwestern ethanol will be eliminated from the fuel market in California by 2018 if the standard is upheld, he said.

Oil industry groups also oppose the standards, which discourage refiners such as Chevron Corp. (CVX) and Tesoro Corp. (TSO) from processing types of crude that release more carbon when produced and transported into the state, such as output from Canada’s oil sands.

California, the most populous U.S. state, is also the country’s biggest buyer of new cars and trucks. In the first half of this year, the state’s residents bought 827,614 new vehicles, or 11.4 percent of the nationwide total, according to data from the California New Car Dealers Association.

2013 Delivery

California carbon allowances for December 2013 delivery slipped 25 cents per metric ton on Dec. 30, a day after O’Neill’s ruling. Prices continued to tumble in January, reaching a record-low of $13 a metric ton, on speculation that the same argument could be used to block California’s cap-and- trade program.

Futures fell 15 cents, or 1 percent, to $14.25 a metric ton yesterday, according to data compiled by CME Group Inc.’s Green Exchange.

California’s low-carbon fuel standard and cap-and-trade program are both measures developed as part of the 2006 global- warming act, known as “AB 32,” which requires a reduction in the state’s greenhouse gas emissions to 1990 levels by 2020.

Under the cap-and-trade program, the state will set a maximum for carbon emissions from power generators, oil refineries and other industrial plants and cut that limit gradually to achieve a reduction of about 15 percent by 2020.

The case is Rocky Mountain Farmers Union v. Goldstene, 12-15131, U.S. Court of Appealsfor the Ninth Circuit, San Francisco.

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

A Grand Experiment to Rein In Climate Change

LEGGETT, Calif. — Braced against a steep slope, Robert Hrubes cinched his measuring tape around the trunk of one tree after another, barking out diameters like an auctioneer announcing bids. “Twelve point two!” “Fourteen point one!”

Mr. Hrubes’s task, a far cry from forestry of the past, was to calculate how much carbon could be stored within the tanoak, madrone and redwood trees in that plot. Every year or so, other foresters will return to make sure the trees are still standing and doing their job.

Such audits will be crucial as California embarks on its grand experiment in reining in climate change. On Jan. 1, it will become the first state in the nation to charge industries across the economy for the greenhouse gases they emit. Under the system, known as “cap and trade,” the state will set an overall ceiling on those emissions and assign allowable emission amounts for individual polluters. A portion of these so-called allowances will be allocated to utilities, manufacturers and others; the remainder will be auctioned off.

Over time, the number of allowances issued by the state will be reduced, which should force a reduction in emissions.

To obtain the allowances needed to account for their emissions, companies can buy them at auction or on the carbon market. They can secure offset credits, as they are known, either by buying leftover allowances from emitters that have met their targets or by purchasing them from projects that remove carbon dioxide or other greenhouse gases from the atmosphere, like the woods where Mr. Hrubes was working.

Dozens of verifiers from different fields, from chemists to accountants to foresters, will be the first line of defense in making sure the benefits are real.

Mr. Hrubes said his goal in any audit was to ensure that the forest’s owner was “being conservative whenever a judgment call has to be made” in calculating greenhouse gas reductions.

The outsize goals of California’s new law, known as A.B. 32, are to lower California’s emissions to what they were in 1990 by 2020 — a reduction of roughly 30 percent — and, more broadly, to show that the system works and can be replicated.

The risks for California are enormous. Opponents and supporters alike worry that the program could hurt the state’s fragile economy by driving out refineries, cement makers, glass factories and other businesses. Some are concerned that companies will find a way to outmaneuver the system, causing the state to fall short of its emission reduction targets.

“The worst possible thing to happen is if it fails,” said Robert N. Stavins, a Harvard economist.

Just three years ago, California’s plan was viewed as a trial run for a national carbon market that one day might tie into existing markets in Europe and elsewhere. President Obama’s first budget proposal included a cap-and-trade program to cut national greenhouse gas emissions 14 percent by 2020; the House later passed an energy andclimate bill that incorporated such a program.

But in 2010, political forces backed by the biggest emitters, oil and coal companies, blocked the plan in the Senate. In that year’s midterm elections, conservative Republicans disavowed their party’s role in creating similar programs; they continue to deride it as “cap and tax.”

California air regulators are proud of their record in leading the nation to new auto emissions standards in the 1960s and efficiency standards for appliances in the 1970s. And so the pressure is on the state’s Air Resources Board to get this right.

At first, only four means of carbon reduction will be approved for offset credits: timber management, the destruction of coolant gasescuts in methane emissions from livestock waste and tree planting projects in urban areas. Already, developers of offset projects in more than 20 states are preparing to enter the new market, which for now accepts only credits generated in the United States. Some projects send coolant gases to be destroyed at an incinerator in Arkansas; others, tied to dairies in states like Ohio, Virginia and Wisconsin, will capture methane from livestock waste.

Most of these projects already sell offset credits in other markets like the Regional Greenhouse Gas Initiative, a cap-and-trade program covering utilities in the Northeast.

But offsets can be prone to misuse; some have generated significant private profits while producing questionable environmental benefits. The European Union’s eight-year-old carbon trading market has been tarnished by fake credits and audits that failed to meet minimum standards. California’s offsets have already been challenged in court by environmentalists who argue that offset developers will earn money for actions that they would have taken even if the program did not exist.

“If there is a loss of confidence because there is a sense that people have been cheating and the offsets are not real, that will be a problem,” said Kevin Kennedy, an economist with theWorld Resources Institute in Washington.

That is why there is such a need for qualified verifiers. This summer, four foresters from around the country gathered in a Los Angeles suburb for a $2,900 test-preparation course to master the new system in advance of a required state test.

All had experience in verification in other carbon trading systems — so much so that they offered their instructors sharp critiques on the 111 pages of rules. One even challenged the algorithms central to the forest benefit calculations.

“If they don’t get the equations right, there could be a real problem,” said Terese Walters, a forester from Oregon. She is hoping that having California credentials will lead to lucrative opportunities. Ms. Walters and Caitlin Sellers, a forester from Florida in the class, both work for Environmental Services of Jacksonville, Fla., one of the country’s largest environmental consulting firms. David Bubser, another student, is a Minnesota forester and a regional manager for the nonprofit Rainforest Alliance.

There are several basic requirements for a forest offset. Credits cannot be granted for preserving trees that were going to be left standing anyway. The change must be long-lasting: trees must be left intact for a century. And owners must hire accredited verifiers to audit their claims.

The offset marketplace is already beginning to hum as companies gear up for California’s rollout.

Independent verifiers can make $800 to $1,200 a day, according to Mr. Bubser. Scientific Certification Systems, Mr. Hrubes’s employer, which verified 4.2 million tons of carbon offsets around the world last year, added two foresters this summer, for a total of six.

Sacramento’s municipal utility recently held a conference call with potential vendors of credits to offset some of the 1.2 million tons of carbon dioxide emitted annually from its gas-fired power plant — possibly by buying 200,000 credits annually.

Utility officials made it clear during the call that the more measurable and reliable the offset, the more valuable it would be. The administrators of California’s program have set a floor price for allowances at $10 per metric ton of emissions during the first auction in November. Once the program gets going, the actual value of allowances will fluctuate as they are traded.

The Redwood Forest Foundation, created to promote sustainable forestry but also to keep timber jobs in Mendocino County, is considering selling offset credits. Its biggest asset is the 50,000-acre Usal Redwood Forest, where Mr. Hrubes was working, which the foundation acquired in 2007 with a $65 million bank loan. The foundation needs to pay down its debt. It reaped $19.5 million selling a conservation easement last year, but the idea of a new revenue source is alluring.

“When you need an economic return, one way is to maximize timber harvest,” said Tom Tuchmann, the group’s acting executive director. “The other way is to look at nontraditional value streams.”

But making strategic decisions about how many trees to harvest and how many to use to lock up carbon is an uncertain business. Other carbon markets have generally not done well by investors, and some brokerages have closed their carbon desks.

“There are so many people who are disappointed,” said Thaddeus Huetteman, the president of Power and Energy Analytic Resources of Atlanta. “What they are really looking for is for California to show we can create a new market of significance in the world’s ninth-largest economy.”

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Rethinking Some Old Habits, One of Them Close to Home

RAND_TR1170

By JUSTIN GILLIS

Readers who give up print newspapers and switch to digital devices will gain a benefit many have probably not thought about: they will be slashing thecarbon emissions associated with their news habit.

That is the conclusion of a new report from the RAND Corporation that uses news-reading habits as an example to make a larger point. Efforts to reduce energy consumption often focus too narrowly on improving existing practices, the authors found, rather than on rethinking old habits from the ground up.

In this example, publishers concerned about energy costs might tend to buy more efficient delivery trucks, and paper mills might seek production economies. But the bigger gains for the environment would come from focusing on the ultimate goal – getting news to people – and asking how it could be done with the lowest carbon emissions.

Printing and distributing a single newspaper subscription for a year emits 208 pounds of greenhouse gases to the atmosphere, the report estimated. E-readers also lead to emissions, of course – energy is consumed to make the devices, run the computer servers and so on. But the amount is far less: reading news for a year on such a device would lead to emissions of about 54 pounds of greenhouse gases, the report estimated.

The number in either case is a mere rounding error in the overall problem of greenhouse gases, with the average American emitting something like 20 short tons a year. But newspaper subscriptions are only a convenient example – RAND sees opportunities to rethink our habits in relation to clothing, food, waste disposal, transportation, health care and other aspects of life.

The RAND report calls this approach “energy services analysis.” The idea is that focusing on the human wants and needs that energy is used to satisfy, and working backward from there, would free people to see the gross inefficiencies that may be lurking within our old habits. It’s not an entirely new idea, of course, but the RAND report is one of the clearest expositions of it that I have seen.

Speaking of old habits, another example the report cites is vehicle use. With the rising price of gasoline and fears about global warming, many people have become interested in buying more fuel-efficient cars. But the report points out that potentially larger gains could be made if more people got rid of their cars entirely and enrolled in the vehicle-sharing programs that have become available in many cities, like Zipcar and Hertz On Demand.

People who do that tend to drive less overall but still have access to a car when they really need it. Moreover, the report points out, more intensive use of each car by multiple drivers cuts the overall demand for cars, and therefore the carbon emissions associated with producing them. These indirect emissions are substantial.

The RAND report was commissioned by the Department of Energy, and it offers some tentative ideas about how government policy could promote these kinds of shifts. Whether the department will step into this arena is unclear. The Obama administration is already under attack by Republicans for its energy policies.

And anyone willing to embrace the RAND framework in principle still has to deal with the inertia of old habits and settled ways of doing things.

Publishers still make a lot more money from the old print model than they do on digital subscriptions. Until the economics of that change, they don’t have much incentive to try to speed the shift.  Bill Grueskin, a former editor of mine,  now at Columbia University, joined some colleagues in producing an excellent report on the economic issues publishers face.

Individual habit plays a big role, too. Two print newspapers show up on my doorstep every morning. Each Saturday, when I haul what must be 20 pounds of paper to the recycling bin, I’m reminded of the environmental costs. I own several e-readers and get news on them, too, but I am still finding the print habit hard to break.