Cash for Carbon: Carbon Markets and Regulatory Alternatives

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Cash for Carbon Carbon Markets and Regulatory
Alternatives

• The Florida Landscape
• Carbon Costs and Opportunities
• Michael D. Wallander
• Greenberg Traurig, LLP

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Disclaimer

• Please note that these remarks are solely my
  personal views, and do not necessarily reflect
  the views of my employer, Greenberg Traurig,
  including any individual shareholders or clients
  of the firm.
• Moreover, my statements are not intended to
  serve as and should not be construed as legal
  advice.

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What Is A Carbon Market?

• A market-based method of regulating carbon
  emissions (e.g., as compared to command and
  control regulation or a carbon tax)
• Basics of a Cap and Trade Regulatory Scheme
• Emitters Subject to Cap on Emissions
• Cap can apply economy wide (e.g. Kyoto) or to
  discrete economic sectors like power,
  transportation, manufacturing, etc. (e.g., RGGI
  power sector).
• If reduce emissions below the cap, entitled to
  Trade excess as credits
• If emitters cannot meet cap internally, buy
  credits externally
• Credits can also be created from recognized
  projects that reduce, avoid or sequester carbon
  emissions.

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Sources of Direct U.S. GHG Emissions
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Market Voluntary or Mandated

• Mandated Markets
• RGGI electricity production in Northeast US
  states
• Kyoto International program to reduce global
  carbon emissions
• Functions as a market but also as a subsidy and
  political mechanism1
• United States signed but has not ratified
• Will expire in 2012 if not renewed.
• Voluntary Markets and Standards
• Chicago Climate Exchange (CCX) voluntary
  participation but contractually binding
• Voluntary OTC Offset Market
• Numerous Voluntary Standards (e.g., Voluntary
  Carbon Standard (VCS), Climate Community
  Biodiversity (CCB), Voluntary Offset Standard
  (VOS), Gold Standard, etc.)
• In US, primary driver of voluntary trading is
  pre-compliance with prospective legislation
• Credits from forestry renewable energy projects
  account for nearly 70 of all voluntary offsets
  (Ecosystem Marketplace 2007)
• See Michael Wara, Measuring the Clean
  Development Mechanisms Performance and
  Potential, Working Paper 56 (July 2006)

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Carbon Offset Requirements

• Both regulated and voluntary markets generally
  require that a carbon offset credit be
• Real
• Measurable and Independently Verifiable
• Additional
• Permanent
• Enforceable
• Reduce / Avoid / Sequester 1 ton of CO2 (or
  equivalent) GHG emissions
• Unique (no double counting)
• Transparent
• The devils in the details Stringency of these
  elements differs with each program

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The Florida Landscape

• Most direct emissions in Florida come from
  electric utilities (50) and transportation (41)
  (Source FDEP)
• In 2004, Florida was second only to Texas in
  emissions from producing electricity
• In 2004, Florida was third behind only California
  and Texas in emissions from transportation
• Florida in the process of examining / adopting CA
  CAFE standards for cars
• Is this a good thing?
• Florida has potential for a wide range of carbon
  offset projects (solar, wind power, agriculture,
  land fill/wastewater gases, land use, green
  building, mass transit programs, etc.)
• Query Can Florida produce a net surplus of
  offset credits?

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CO2 Emissions from Electricity Production (Top
25 States Source EPA)
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CO2 Emissions From Transportation(Top 25 States
Source EPA)
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McKinsey Global Supply Curve (a Global
Opportunity Map)
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Possible Project Types (per federal
Warner-Lieberman proposed legislation)

• Agricultural sequestration and management
• Altered tillage practices
• Winter cover cropping, continuous cropping and
  other means that increase biomass return to soil
• Conversion of cropland to rangeland or grassland
  (if in non-forest use for prior 10 years)
• Reduction in nitrogen fertilizer use
• Reduction in carbon emissions from organic soils
• Land Use and Forestry
• Afforestation, reforestation or forest management
• Manure Management and Disposal
• Other action that result in avoidance or
  reduction of GHG emissions
• Does this catch-all phrase allow for carbon
  offsets from building efficiency, renewable
  energy, etc.?

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Developing a Project Design Document (PDD)

• Determine project baseline and timeline
• Determine project scope and methodology
• Additionality (simple definition) the project
  would not have occurred under a business as
  usual scenario without carbon offset credits
• Limit leakage shift CO2 emissions from
  covered to uncovered sources
• Subtract / Net-Out All Fugitive Emissions
• Submit PDD for Approval / Validation /
  Registration
• Monitor ongoing compliance with PDD
• Verification (Audit / Management System)
• Certification
• Issuance

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Key Contractual Issues

• Define what is to be sold (CERs, CFIs, VERs,
  VCUs, etc.)
• Determine and identify ownership of credits
• Describe when and how credits to be sold and
  transferred allocate market risk structure
  unwind terms
• Address short and long term verification program
• Address project risk management quantify and
  allow for shortfalls / non-delivery / specific
  country and credit risks/ change of laws/ force
  majeure
• Provide for warranties/ indemnities/ insurance
  coverages
• Identify dispute resolution process/ venue /
  choice of law

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Sale of Credits

• Credits can only be used in year they mature / no
  carry-overs
• Credits can, however, be sold on a spot, forward,
  option or derivative basis
• Risk that forward/option carbon credits can not
  be delivered
• Risk of non-delivery, etc. results in discount
  for present value
• Significant administrative expense to achieve two
  primary goals
• Establish the carbon offset credit (reduction in
  emissions)
• Make it fungible / tradable / useable by third
  parties
• How much money (per ton)? (Expressed in Euros
  vs. US Dollars)
• EUAs (ETS) 22 - 24 (33 - 36)
• CERs 10 - 17 (15 - 26)
• VERs (Voluntary Mkts) 1 - 10 (2 - 15)

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Securitization

• Securitization is the transformation of an
  illiquid asset into a tradable security
• Most emission reduction contracts are bilateral
• Emission reduction contracts can be pooled by
  assigning them to an aggregator
• To be attractive and available for pooling, the
  emission reduction contracts should be
  homogenous, stable, transferable and unencumbered.

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Status of the Law

• CFTC
• Emission allowances are an exempt commercial
  market (ECM) under the Commodity Exchange Act.
• Trading is still subject to anti-manipulation and
  antifraud provisions.
• CCX subsidiary, the Chicago Climate Futures
  Exchange (CCFE), is registered and approved as a
  designated contract market (DCM), which gives the
  CFTC oversight authority.
• FTC
• Currently examining trends in marketing carbon
  offsets and RECs
• the nature of these commodities
• product marketing
• consumer perception of carbon offset claims
• potential market problems (double counting,
  etc.)
• third-party certification and standards setting
• the issue of additionality and potential for
  deception
• state of substantiation and
• the need for additional FTC guidance.
• Proposed Legislation
• Federal Warner-Lieberman Bill
• Florida Governor Crists Action Team on Energy
  and Climate Change Phase 2 Report

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Three Recommendations For Florida Regulators

• Avoid governmental action that mandates a
  stringent baseline (e.g., strict building code
  stds.) because it frustrates potential
  development of market mechanisms
• Broad-based, objective project standards,
  streamlined regulation and simplified
  verification would reduce up front costs and
  result in more feasible projects
• Create competition by allowing importation of
  offsets from out of state (including other
  countries) - this reduces economic costs and
  prepares Florida for integration with national /
  supranational market

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Thank You!

• Always happy and available to answer questions
• Michael D. Wallander, Esq.
• GREENBERG TRAURIG, P.A.
• 777 South Flagler Drive, Suite 300 East
• West Palm Beach, FL 33401
• Telephone [phone]
• Email WallanderM_at_gtlaw.com