Category Archives: Carbon GHG

Is a 45,000 fine in your future?

Any UK organization with half-hourly metered electricity that used more than 6,000 MWh in 2008 that does not register for the UK-wide CRC Energy Efficiency Scheme before September 30, 2010 could be fined as much as £45,000!

Previously known simply as the Carbon Reduction Commitment, the CRC Energy Efficiency Scheme is an emissions trading scheme introduced by the UK government to cut greenhouse gases by 1.2 million tonnes of carbon per year by 2020. Organizations are now required to monitor their emissions, and if they exceed this threshold, they need to purchase allowances to emit additional tonnes of CO2 or face a hefty fine.

The government estimates that as many as 5,000 organizations exceed the threshold, but only 1,229 have registered to date. Eligible private and public sector organizations that don’t meet the registration deadline will be immediately fined £5,000 plus an additional £500 penalty for every subsequent working day the company fails to register, to a maximum of 80 days. Is your company one of the roughly 3,800 that hasn’t registered yet? Are you sure?

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You Did Not Predict the Weather? Too Bad. See You In Court!

As if you didn’t have enough risks to worry about, now, as per this recent article in Industry Week on Climate Change Risk Management, you now have a new risk to worry about. If you don’t anticipate extreme weather events that can cause sudden and material damage to business assets, interrupt business operations directly, or disrupt key elements in transportation or support activities, then you might be sued by your investors for losses from your failure to disclose and anticipate those risks, just like American Electric Power Company was sued by the state of Connecticut.

Right now most of these claims are limited to “public nuisance” claims based on GHG emissions (which, according to various plaintiffs, have contributed to events like Hurricane Katrina), but they could be brought under security laws in the near future, now that the SEC has issued interpretative guidance for publicly traded companies related to climate change disclosure. Any company that fails to disclose in accordance with the guidance could be on shaky ground, especially now that shareholders’ resolutions for disclosure of management’s responses to climate change are becoming much more frequent in proxy statements.

In other words, if you’re not identifying all your risks, disclosing all your significant risks, and preparing to mitigate those risks, you’re not only on the fast track to major disruption and loss, but lawsuits that drag on forever.

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A Great Argument for Carbon Taxes (and Credits)

A recent article in Knowledge @ Wharton Universia on phishing, bribery, and falsification: combating the complexities of carbon fraud provides a great argument on why cap and trade should be abandoned in favour of straight carbon taxes (and credits if the goal is to encourage corporations to be as efficient with carbon emissions as possible). According to the article, carbon trading systems, especially when coupled with lax Internet security and third party verification, pose a great opportunity for crooks who want to defraud honest companies out of millions of dollars.

The first example the article gave was of a group of rouge traders who, earlier this year, stole as much as $4 Million by posing as regulators, setting up a fake, but official-looking website, and using it to obtain carbon trading account information from companies and traders who thought they were complying with government requests. The scheme forced the German Emissions Trade Authority to suspend trading, but not before 250,000 permits had been stolen.

The second example was that of Carbon Harvesting Corp who’s director has been arrested and charged in connection in an alleged scheme to pay $2.5 Million to “rent” a fifth of Liberia’s forests and profit by selling the credits that could be obtained from the carbon absorbing trees.

All in all, Europol estimated that tax fraud associated with carbon trading reached 6.5 Billion over 18 months, and in some countries, up to 90% of trading volume resulted from fraudulent activities. A recent report on Ten Ways to Game the Carbon Market identified 10 scams common to carbon trading … and the list was not necessarily all-inclusive.

But if there’s no trading, there’s no opportunity for trading fraud. And there’s no need for trading if governments simply levy a tax on every tonne of carbon emitted. Furthermore, if the goal is to compensate companies that are being extra efficient about carbon emission, there can also be carbon credits where companies that emit below a floor can get tax credits. In fact, it only takes a simple algebraic formula to capture taxes and credits in a joint system: (tons emitted - tons allowed) * tax per ton. For example, if it’s $10 per tonne, the company has an allowance of 1,000 tons, and the company emits 2,000 tons, then the company would pay (2,000-1,000)*10 = 10,000. And if it’s $10 per tonne, the company has an allowance of 1,000 tons, and the company emits 500 tons, then the company would get a credit of (500-1,000)*10 = 5,000 on its tax return. Simple.

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Smart Cars Are Here, But Where Are Our Smart Grids To Charge Them?

The November 9th print edition of Canadian Business had an article by Heather Li on “Charging Cars for Pennies …” that had an amazing calculation that, if it were more widely known, could totally change the way we look at smart cars. By using wasted power, smart grids can charge electric cars for 42 cents a night!

Let’s see … in a fuel efficient car with gas prices at about $3 a gallon in the US and over $4 a gallon in Canada, you’re paying at least $30 in the US and at least $40 in Canada for a tank of gas that will get you the same 400km to 500km of travel that an electric car with a high-performance lithium-ion battery pack will get you … which could cost you a mere $0.42 to recharge. Now, it’s true that the batteries will eventually need to be replaced … but as the new battery packs have an estimated life of about 250,000 km, you might replace the smart car first!

How could we do it so cheap? It has to do with the fact that while our power demands fluctuate throughout a 24 hour cycle, power production does not. Water doesn’t stop flowing, nuclear reactions don’t stop half way through the chain, and it’s just not practical to shut down coal plants. As a result, much of the energy produced at night goes to waste. In Ontario, the difference between how much is used and how much is produced in off-peak night hours is often 10,000 mega-watts — which is potentially enough power to support one million electric vehicles! And, as you guessed, the power companies lose money on this production (which they make up for by charging a rate for energy consumption that covers the average total cost of production over a 24 hour period, and not just the cost of the energy you use). But if we had a smart grid, that utilized new smart meters, it could be programmed to charge our smart cars during times of peak excess energy availability and the power companies could charge us a fraction of a penny per kWh (or just a few dollars per MWh, instead of the average consumer price of $27.59 per MWh in Canada in November) and still make a profit.

Bring on the Smart Grids!

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Highlights from the Preliminary Draft Regulation for a California Cap-And-Trade program, Part II

On November 24, 2009, California released a preliminary draft regulation for a cap-and-trade program, in accordance with the California Global Warming Solutions Act of 2006 (AB 32) for public review and comment. At 132 pages, it was a doozy. Most likely in an effort to minimize comments, the deadline for comments on the initial draft is January 11, 2010.

In this post, we’re going to review some of the important points from sub-articles 8 through 15 and summarize the draft.

SubArticle 8: Distribution of Allowance Value

Allowance value is the economic worth of allowances issued. This section has not yet been drafted. However, the discussion of concept notes that some allocation of allowance value may be justified to compensate those disproportionately impacted by the imposition of the cap-and-trade program, that allowance value could be provided to the public in the form of per-capita rebates or cuts in individual income tax rates, and that allowance value could be applied to targeted public spending programs deemed necessary to achieve the requirements set forth in AB 32.

SubArticle 9: Auction Design and Mechanisms for Distributing Auction Proceeds

The Executive Officer may serve as auction operator or select an entity to serve as auction operator. Entities that want to participate in an auction, which will be announced with at least ninety days notice, must register at least thirty days in advance.

SubArticle 10: Free Allocation Mechanism

This section has not been drafted and does not include a discussion of concept.

SubArticle 11: Trading and Banking

Trading will be somewhat restricted and trades can not be made:

  • if they are to a party whose identity is not disclosed to the Executive Officer,
  • if they manipulate the value of a published market index,
  • if they corner or attempt to corner the market for a regulated instrument, or
  • if they are fraudulent or attempt to defraud another entity.

There will be a holding limit for each registrant or group of registrants. Furthermore, the number of compliance instruments a covered entity is allowed to own may be restricted to an amount sufficient to cover its emissions.

A GHG allowance may be held, or banked, for a future compliance period, subject to the holding limits.

SubArticle 12: Linkage to External Trading or Offset Crediting Systems

Compliance instruments issued by an external greenhouse gas emissions trading system (GHG ETS) or a greenhouse gas offset crediting system may be used to meet the requirements of this article only if the GHG ETS or GHG offset crediting system has been approved by the Board as provided in this sub-article. In other words, you might not be able to buy off the CCX (Chicago Climate Exchange), the ECX (European Climate Exchange), or the ACX (Australian Climate Exchange) to meet your requirements.

SubArticle 13: Offset Credits

An offset credit used for compliance purposes must represent a reduction or avoidance of GHG emissions or a GHG sequestration that is real, additional, quantifiable, permanent, verifiable and enforceable. An offset credit will (only) result from an approved offset quantification methodology that is standardized, replicable for any offset project of that type, and that includes plans for monitoring and reporting consistent with an offset project of that type. There are a number of requirements for the methodology, including the requirement that it ensure that the offset project type does not cause or contribute to adverse effects on human health or the environment.

SubArticle 14: Enforcement and Penalties

Penalties may be assessed pursuant to the Health and Safety Code, Section 41513.

SubArticle 15: Other Provisions

Each provision of the article is deemed severable.

So what does this mean? Essentially, if you produce, or cause the production of, CO2,

N2O,

CH4,

SF6,

HFCs,

PFCs, and

NF3, you will likely be affected by the act. If you produce less than 25,000 MTCO2e of GHG annually, you might be exempt until 2015, but as of January 1, 2015 you will be required to track, report, and independently verify your emissions. If you do not have enough allowances, you will have to either effect a trade, which will be restricted, try to acquire more through an auction, or try to get offset credits approved. If you are unable, you will be subject to as yet undefined penalties, which may be assessed pursuant to the Health and Safety Code, Section 41513.

In a nutshell, carbon cap and trade is coming, within 5 years and one month you will be affected, and if you’re not ready, it will cost you. How much will be determined as the key sections are finalized over the next six months. If you’re a major producer of GHG emissions in California, you should probably attend the workshop to discuss the proposal being held on December 14, 2009 to get a sense of what the final draft is likely to look like, as it will likely be law in less than two years.