Daily Archives: August 4, 2009

Kate Mackenzie

The US Cogressional Budget Office has published a brief on how carbon offsets might work under the Waxman-Markey bill’s regime. Like the European Union scheme, Waxman-Markey proposes to allocate a set amount of allowances to polluters covered by the bill, but those who exceed over their limit could, in addition to buying allowances from other organisations, also pay for offsets – emissions reduction projects either in the US or overseas.

This would be somewhat cheaper than paying for extra allowances, and would in turn reduce pressure on the price of allowances themselves.

Sounds simple, but offsets are one of the most controversial aspects of the proposed scheme. Even the New York Times took aim at them in an editorial last month.

The CBO’s conclusion? Well, unsurprisingly they say it is difficult to calculate, but that it could reduce the costs quite a lot. In fact, from estimates the costs in 2030 of ‘various’ carbon reductions schemes, the cost reduction could be quite considerable:

It’s a somewhat fuzzy set of numbers – though we can’t blame the CBO for that – but it’s fascinating to see that the higher the reduction targets, the more offsets could make a different to costs.

(Note that this is the per-metric ton of CO2 equivalent price; bigger reductions would mean tighter caps which would in turn mean higher total costs, which are not shown here. But reducing the effective price of greenhouse gas emissions would no doubt make a big difference.)

So yes, carbon offsets represent a huge saving, and this is why the Waxman-Markey/ACES bill relies on them so extensively. But they also raise all sorts of difficulties which have seen them attract a great deal of criticism: what if the ‘reductions’ that are paid and accounted for would be undertaken anyway? What paying for an offset simply moves the emissions some place else?

The CBO papers identifies four key areas of offsets that must be verified:

- Offsets would need to bring about additional reductions in GHGs. That is, they would need to result in reductions that would not have occurred in the absence of the program that grants credit for offsets.

- Offsets would need to be quantifiable so that any reductions in GHGs could be reliably measured.

- Offsets would need to be permanent rather than simply delay the release of GHGs into the atmosphere.

- Offsets would need to be credited in a way that accounted for leakage in the form of higher emissions in other locations or sectors of the economy as a result of the offset activity.

On the difficult question of additionality, they note, the carbon development mechanism (CDM) scheme mandated by the UN and used in the EU’s carbon reduction scheme use three of the ‘simple’ measures:

Simple strategies include accepting only activities that are not mandated by other laws, activities that reduce GHGs after a specified date, and activities that are not common practice.

In addition, the CDM requires projects prove they could not be implemented without the CDM.

As we’ve noted before, proving this is complicated and can go wrong: a large verifier of CDM schemes was suspended by the UN last year (and subsequently reinstated) over questions about its own auditing.

And all this auditing is costly: the CBO estimates about $5 per ton goes into the verification. International verification is considered more difficult than that of domestic projects: The Waxman-Markey bill, as it stands now, requires international offsets to reduce 1.25 tons of greenhouse gases to be counted as one ton under the scheme.

But a reduction in emissions is a reduction, no matter where it takes place, and concern over costs weighs so heavily in the debate over cap-and-trade that it’s difficult to see the scheme going ahead without it.

Related links:

Carbon offsets and the problem of additionality (FT Energy Source)

Kate Mackenzie

On FT Energy Source:

Heritage: In for a penny, in for a pound in Kurdistan

Wind turbine manufacturing in the UK – and beyond

Markets: Commodities pause after sprinting higher

Fundamentals slide further from view

On FT.com:

Nasser picked for chairman of BHP Billiton

Tax bill wipes out Statoil Hydro profits

Further reading:

GE’s Jeff Immelt and venture capitalist John Doerr worry about the US falling behind in clean tech, prompting much angst (The Washington Post, CNet, WSJ)

Why environmental economists should love Exxon (Energy Collective)

India to build four more nuclear reactors (Economic Times)

Shifting economies to use more natural gas (Gregor.us)

Brazil’s new oil law to go before congress this month (UpstreamOnline)

Clean coal coalition caught up in astroturf scandal (Politico)

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Kate Mackenzie

London-listed small oil company Heritage and Turkey’s Genel, in attempting to consummate their merger, had to deal with the pesky problem of a $1.1bn of liabilities owed by Genel to the Kurdistan Regional Government.

Under the arrangement with the KRG, Genel’s parent company Cukurova was to pay $605m of the liability, while the remaining $495m became a long-term liability of the new merged company. Instead, Heritage and Genel are proposing to pay it off all at once by issuing equity to the regional authority.

This was hinted at by Heritage’s chief financial officer Paul Atherton last month when he mentioned an ‘equity consideration’ could be part of the settlement. Today Heritage announced that the entire liability would be paid for in equity, with KRG to  be issued 96m shares in the new company.

Commodity markets paused for breath on Tuesday after sprinting to their highest levels of the year in the previous session following a sharp weakening of the US dollar and positive manufacturing data which bolstered hopes for an early global economic recovery.

In energy markets, Nymex September West Texas Intermediate oil held above the $70 a barrel level, trading $1 lower at $70.58 after reaching $71.95 in the previous session.

ICE September Brent lost 62 cents at $72.93 a barrel after reaching a 2009 high at $73.75 in the previous session.

Read the full commodities report

Kate Mackenzie

Oil prices quickly fell back to earth after Brent crude yesterday reached a year-high of $73.50 — an unsurprising rise given the positive manufacturing data from China and the US, a weaker US dollar and a surge in global equities.

So oil surged on a number of macro-economic factors, despite the oil majors being almost universally pessimistic in their demand outlook in last week’s second-quarter results.

Fiona Harvey

It was an extraordinary thing for the British Wind Energy Association to say.

In a briefing note sent to journalists late on Friday, the BWEA admitted that there was no business case for building a new manufacturing plant for onshore wind turbines in the UK. Nor was there a business case for Vestas to keep its wind turbine manufacturing plant open.

This is a blow to the UK government’s low-carbon industrial strategy, which relies on attracting wind manufacturing jobs to the UK, as well as jobs in wind farm installation and maintenance.

Onshore wind is a limited market in the UK because of the huge difficulty of gaining planning permission for wind farms.

The BWEA argues that in order for a turbine maker to set up a factory in the UK, or for Vestas to convert its factory from making blades for the US to making blades for the UK, the company would need to be confident of having about 1GW of new orders per year. There is no chance of that happening, given that the cost of doing so would make the company’s products uncompetitive compared with rival products from Denmark, Germany and Spain, where most of the turbines installed in the UK come from.

James Fontanella-Khan

Energy agency warns on oil price increases
Economic recovery at risk, says IEA (FT)

Banks and oil groups lead rally
Markets reach highest level this year (FT)

Joint venture revives Italy’s nuclear hopes
Tie-up between EDF and Enel hints at comeback for industry (FT)

China refiners boost diesel output on fishing season
Auto sales should also support gasoline consumption (Bloomberg)

Chesapeake 2nd-quarter profit, more asset deals seen
Sees $2.35bn to $3.05bn in 2009 asset deals (Reuters)

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