August 13, 2009
The Business and Politics of Carbon
by Alison Wise, National Renewable Energy Lab
The activity around making markets for carbon continues to grow as climate issues gain more traction in the policy realm under a new administration. For those who are not up to speed on the ins and outs of carbon markets in general, I would refer them to the last time I wrote about the issue, a link to which can be found at the end of this article.
This time around I will focus on the business case for carbon offsetting and on the treatment of carbon in the Waxman-Markey legislation currently being debated in Congress. Broadly speaking, voluntary carbon markets refer to the markets for carbon credits outside the scope of regulated carbon reduction. They are driven by businesses and organizations that pay a third party to make a measurable reduction in greenhouse gas emissions (usually CO2) though they have no legal requirement to do so. This reduction “offsets” the organization’s current carbon footprint, “crediting” it with the equivalent reduction.
Until legislation mandates some sort of action towards carbon mitigation, whether a cap and trade mechanism or a carbon tax, there is no compliance market for carbon nationally in the United States. According to a recent report by New Energy Finance, the value of the transactions in the voluntary carbon market globally has doubled in the past two years, increasing from US $335 million in 2007 to $705 million in 2008.
It is interesting to dig a bit deeper into why these voluntary markets are growing despite having no compliance mechanisms. Ultimately, a regulated market for carbon based on mandatory parameters may be the most effective, but in the interim there has been increasing involvement with voluntary carbon markets, with the drivers coming from the private sector. The New Energy Finance report outlines some interesting findings for the “business case” for carbon off-setting:
First, New Energy Finance identified 3,000 organizations that were end-buyers of voluntary carbon offsets. This number was seen as “significant” given the industry’s common characterization as a “fringe” entity.
The greatest business benefit from carbon offsetting is the protection or enhancement of corporate reputation, according to those surveyed in the New Energy Finance report. This is interesting in light of the fact that one of the drivers for sustainability measures within corporations in general is risk mitigation. Companies have reported that a motivating factor for adopting sustainability principles is the protection or enhancement of brand value, an intangible asset that all companies need to protect. It seems that this motivation applies to carbon offsetting as well.
While a business case can be made for carbon offsetting, it was not the only reason for engaging in that activity. According to their respondents, 15% of those companies New Energy Finance surveyed said that offsetting their emissions was driven by the desire to be a good corporate citizen (that said, one could argue that being a good corporate citizen inherently protects your brand’s reputation, which is good for the bottom line).
Surprisingly, carbon offsetting activity did not positively impact employee morale in any significant way. In fact, employees were confused about how carbon offsets worked and why it was beneficial to engage in this activity.
Finally, given the “scale and diversity” of offset users, New Energy Finance predicted that the voluntary carbon market will continue to grow, once the global recession is over.
While the voluntary carbon market is an important transitional step toward an economy that captures the true cost of a carbon intensive energy system, it will most likely take some sort of regulatory approach to accelerate the internalization of carbon externalities in the marketplace. So, let’s turn to the most prevalent legislative mechanism that is seeking to accomplish that end: The Waxman-Markey Clean Energy Bill (H.R.2454), otherwise known as the American Clean Energy and Security Act of 2009 (ACES Act).
According to many spectators and participants, this bill represents a demonstrable move towards the United States adopting clear, identifiable carbon reductions. That said, according to those involved with the clean energy industry, there are many challenges to be met in terms of decision-makers crafting a piece of legislation that would effectively address the carbon issue, in turn accelerating the markets for energy efficiency and renewable energy.
Tim Greeff, political director at the Clean Economy Network, puts it this way, “While there are many important provisions in the legislation that will help facilitate a more rapid transition to the deployment of cleaner technologies, the legislation faces a substantial hurdle in the Senate. As it stands now, there are well over a dozen Senators who have significant concerns with different provisions of the bill and are not convinced of its benefits for clean energy, jobs and the economy. ”
The bill outlines a cap and trade mechanism for greenhouse gas emissions reduction, aiming to decrease emissions by 17% by 2020. However, the cap and trade program being designed within this legislation would give away 81% of allowances for free, as opposed to the cap and trade program advocated by the White House which would auction off the allowances and use the proceeds for clean energy investments and a tax cut for the underprivileged. Other aspects of the legislation:
The bill allocates 36% of allowances to the power generation sector through 2025
Auctioned volumes would increase dramatically after 2025, rising from 19% to 65% by 2030. Beginning at a low auction rate would allow covered entities (the power sector) time for the technological transition they will need to make in a carbon constrained economy
The legislation would ease restrictions on offset usage to reduce compliance costs. After 2017, it would remove an 80% offset discount factor for international offsets and allow increased international offset usage to compensate for domestic shortages of offsets when domestic prices are less than or equal to allowance prices
The bill relaxes criteria for inclusion in the early offset supply pool to broaden the scope of eligible programs beyond the Climate Action Registry and the Regional Greenhouse Gas Initiative (this may address some of the shortage issues of domestic offsets)
Getting the program and the price right in this new approach to carbon mitigation will be key to making sure that we are creating the right landscape for accelerating markets for renewables, efficiency services and technology. The internalization of carbon costs into our economic infrastructure will be important for creating the right market environment for the uptake of renewables, perhaps as important as the creation of a smart grid to be able to integrate distributed generation beyond niche applications. But that’s a story for another day.