The American Clean Energy and Security Act (”ACES”)
1)    Clean Energy
2)    Energy Efficiency
3)    Global Warming
4)    Transitioning - protects everyone until adoption

 Part 3 - Global Warming

Global Warming focuses on Cap & Trade. First, it tells us which industries will have caps, such as: electric utilities, oil companies, chemical companies, automobile manufacturers, other manufacturers and energy companies. We are not sure why transportation is missing from this list as it makes up roughly 29% of all emitters in the United States. Surprisingly the list says that it represents “85% of “US global warming emissions.” This means that transportation will be hit indirectly. No clear caps, but higher operating costs. Therefore transportation can hedge themselves through the market.

For example, a transportation company would benefit by buying offset futures that reflect a portion of their carbon footprint. These offsets should rise commensurate with fuel surcharges for cap and trade. Another example would be selling offset futures short to fund reduction strategies. Then the future savings could be used to pay back these amounts.

The other important point is the covered entities emit 25,000 or more metric tons of CO₂e. This mirrors the EPA level, as does the base year of 2005, and covers over 13,000 manufacturing facilities. This would affect all electricity generators and therefore create a huge demand for reduction strategies in that sector. It makes perfect sense in pushing generation away from coal and oil.

The bill asks for reduction levels of 3% by 2012, 20% by 2020, 42% by 2030 and 83% by 2050. Kyoto set a reduction goal of 5.2% from 2008 to 2012 based on a 1990 levels. Kyoto was intended to be a start but Waxman Markey is setting a much more modest beginning level and expecting a steeper cut later. We are looking at a political reality compared to a very urgent problem. It is too little upfront!

Next, the bill introduces the concept of Carbon Offset projects and limits them to 1 billion metric tons domestic and 1 billion metric tons international. Well, there are not 1 billion metric tons in the world to buy and that does not contemplate demands from other companies. These limits are well within reach but more importantly allow for negotiation down.

The bill tries to make sure that entities don’t “buy their way out” of caps. An entity will need to get 55% of their reductions without offsets. Again, this is a high level as emitters will not be able to offset out of the problem for long term anyway. Given the existing level of offsets (mentioned above) it would not me economic to purchase offsets.

There is an early adopter advantage that allows a company to bank credits for future use. Without this provision, a company may withhold reduction strategies as a way to meet future goals. The target is to incent the largest reductions as early as possible. Another interesting provision is that allowances can be borrowed from the future. This could help fund efficiencies from future earnings.

The EPA will also retain 2.5 billion in reserve credits in case “prices rise faster than expected”. This scares me. Where is the political will if there is a way to release these credits. I am reminded of the strategic oil reserve, which becomes a policy issue. I prefer if there were set levels of price or need around this reserve. I also get afraid when the government has an “expected” price level for anything. This is an organization that spends thousands of dollars on hammers and toilet seats.

The Federal Energy Regulatory Commission (”FERC”) would regulate the market under the proposed bill. Again, I would prefer that it be the CFTC as Carbon is a commodity.  The bill also hands the EPA coverage of two pollutants that contribute to global warming: hydrofluorocarbons (HFCs) and black carbon. Lastly, it takes the burden off of the EPA for regulating carbon.

The overall grade for the Cap & Trade section is A-/B+. It recognizes the need for reductions but starts too low. It limits the use of offsets and gives advantage to early adopters of technology. Most importantly it has levers to negotiate.

People act in their own self interest. Shocking, I know. The concept is as basic as any other.  If you offer financial incentives people will more likely act versus appealing to their better nature. Leo Hurwicz received a noble prize for his work on this theory called Mechanism Design. This is a great article on the topic:

http://cla.umn.edu/news/reach/index.php?entry=166436

All too often we look to laws to enforce better deeds. This tends to create friction and often failure. For example, I see people drive over the speed limit on the highway. This is against the law but they have little financial incentive slow down. However, if there is a hazardous condition (i.e. snow or ice) they slow down.  They are acting in their own self-interest. As Leo Hurwicz would say, I am no angel. The government could pay for more surveillance but this would be an expensive endeavor. They would be better served by offering cash incentives to reduce speed to a certain level.

Additionally, we find that many people do not recycle - or only partially do so. However, where there are deposits on cans recycling of cans occurs with greater frequency. It may not be the user who recycles but some one who values the nickel but it gets done. This aligns people to act. If they increased bottle deposits or better yet paid for returns, we would all run to recycle.

Therefore, a command and control system of carbon caps seems naïve. If the government says “you will reduce emissions,” we’ll need a greater enforcement mechanism. Also, the emitters will reduce to their individual cap, and no more. Why should they if there is no incentive? If however, we move to a carbon “cap and trade” then we are recognizing that businesses and individuals will act to maximize their revenue and focus on reducing well below the cap. The ability to sell excess reductions is a tremendous motivator.

This is not a knock on businesses. People can be altruistic, however if definitely want them to act, give them a financial incentive.

The American Clean Energy and Security Act (”ACES”)
1)    Clean Energy
2)    Energy Efficiency
3)    Global Warming
4)    Transitioning - protects everyone until adoption

Part Two: Energy Efficiency. It has 7 subsections - the gist of which is to set one standard for energy efficiency. An ambitious but much needed idea.

The energy efficiency section also looks to addresses a national standard for appliance energy efficiency standards, auto emission standards, fuel economy, and industrial energy usage. If enacted this is a clear shot at LEED and other regional standards. We have heard many cities, states, and regions working on new building rulings that demand new construction meet certain levels of “green.”  For Utilities, it forces them to be more efficient on the off chance that renewable energy standards and carbon caps do not have a strong enough impact.

Other pieces include funding for retrofitting buildings to be more energy efficient. Rebates for pre-1976 manufactured homes “that can be applied toward purchases of new Energy Star-rated manufactured homes.” This allows low-income families get something too. It also, opens the efficiency grants to nonprofit hospitals and public health facilities.

On the face of it this seems a sensible idea. However, the federal government has a major challenge in not watering down standards to the lowest common denominator. We have been fortunate to have spoken to many people in the natural foods business. They point to the FDA rules on organics as an example of how government standards reduced the value of the title organic. Now it is more appropriate to look at natural and local ahead of organic.

In the tradition of teaching to the worst student, the risk is in setting a standard which reduces energy usage slightly for the worst offenders does not reflect the seriousness of the problem. However, we try to remain optimistic that the government will keep standards high. Signals of this are the existing EPA guidelines for Smart Way and EnergyStar.

The American Clean Energy and Security Act (“ACES”) came out as a draft bill that its authors, Congressmen Henry Waxman and Ed Markey, want to adopt as a bill by Memorial Day. It is 648 pages – so I can’t say as I read the whole thing. However, I did read the 5 page summary.

The four ACES are the four Titles of the bill:
i)      Clean Energy
ii)      Energy Efficiency
iii)      Global Warming
iv)      Transitioning – protects everyone until adoption 

We will address this important legislation in four separate posts. It is too important and dense to do quickly.

The first title is: Clean Energy. It has 6 subsections.

1) Renewable Energy Credits (“RECs”). RECs are to be an increasing percentage of retail electricity suppliers generation. The levels start at 6% for two years (2012, 2013) then increases steadily until reaching 25% in 2025. 

What does this mean?
The bill is serious about pushing electric utilities away from coal, oil and gas. It will force the consumer to fund these projects. Oil shocks didn’t scare us into cleaner energy so it looks like the government will force it. For reference, renewable energy is currently 21% of global energy consumption.

2) The second subsection is Carbon Capture and Sequestration (“CCS”). The summary says “CCS is a method of reducing global warming pollution by capturing and injecting underground the carbon dioxide emitted from electricity generation plants that use fossil fuels.”     

What does this mean?
CCS says if you can figure out a way to separate climate change from coal let’s do it. Unfortunately it reinforces the myth of clean coal. A March 20, 2009 Wall Street Journal article, Coal Hard Facts: Cleaning It Won’t Be Dirt Cheap, shows how the science for clean coal is too expensive and not up to snuff. So it looks like a way to give money to Coal plants for more research.

3) The third subsection is Clean Fuels and Vehicles, setting a low-carbon transportation fuel standard. “[T]o promote advanced biofuels and other clean transportation fuels. It authorizes financial support in the form of grants or loan guarantees to cities, states, or private companies for large-scale demonstrations of electric vehicles.”

What does this mean?
Electric cars here we come. It also means money to agriculture for biofuels and a way to fund the purchase of hybrids for buses and government vehicles.

4) Smart Grid and Electricity Transmission. “deployment of a smart grid, including measures to reduce utility peak loads through smart grid and demand response applications and to help promote smart grid capabilities in new home appliances.”       

What does this mean?
Electric utilities need to work better together if we are going to be efficient. It also means GE, IBM and some other large companies get a lot of money to fix things. This is long over due. Most utilities have not taken advantage of technology advances that permit huge energy savings. Read Hot Flat and Crowded for a good summary.

5) Partnering with the States. The draft creates a program to allow each state energy office to establish a State Energy and Environment Development (SEED) Fund, which will serve as a common repository for federal financial assistance for clean energy and energy efficiency projects.

What does this mean?
Politics – nothing gets done if there is no incentive to local governments.

6) Federal Purchases of Renewable Electricity. The draft authorizes federal agencies to enter into long-term contracts to purchase renewable electricity.

What does this mean?
The government is a big buyer of electricity, maybe the biggest. If the government forces others to use renewable energy, they will as well. It also means that renewable energy projects can obtain much needed long-term financing and investment.

Lets be honest, the whole concept of an electric car is cool. No more running out of gas, charge it at night at off peak hours. Since the utility is up and running anyway this is a use of wasted energy. My wife did ask “is it safe?” - our family car is a Volvo, so that is a question worth considering.

Tesla has a good looking electric car that should be affordable in a year or so.

GM has been “working” on the Volt for a long time.

Toyota, Nissan and Ford are putting some effort into creating their own versions.

Yesterday, we read in the NY Times that China is setting a 3-year goal to become the world leader in electric cars.

Both sides of the aisle are convinced that this is an answer to our dependence on foreign oil.  If so, there have to be increased tax incentives to help us all pay for these expensive first-generation vehicles.  Once volumes improve costs will come down and eliminate the need for tax incentives-remember how expensive the first cell phone was? Technology will have to overcome limited mileage based on battery capacity.

Electric cars will make a difference for Climate Change.

If you took all 2009 combined MPG’s from the EPA (not weighted by sales) a US car gets 19 MPG. The average distance travelled is 12,000 miles per year - meaning that on average emissions a year are 5.6 metric tons. But averages have limited value - calculate your own.

I live in Georgia, with a pretty dirty coal- based electrical grid. According to the Tesla Motors the car gets 220 miles per charge equal to 53 kWh. So it gets 4.15 miles per kWh. More importantly - on our dirty grid in Georgia a Tesla would create emissions of 1.8 metric tons of CO2e a year compared to the 5.6 metric CO2e for a gas powered car. Even on the dirtiest grid,  North Dakota, the electric emissions created would be 2.9 metric tons of CO2e. For fun, the cleanest grids, Vermont/Idaho, would emit 0.04 metric tons of CO2e a year.

That being said, it depends on your utility - FPL for example generates 90% of its electricity from renewable sources. Geothermal Energy, Wind, Photovoltaic and Solar Thermal, and Hydropower all create ZERO CO2e for your energy.

One way to look at it is => consolidate the problem in one location electric generation.  It all comes back to the fact that I want an electric car.

Renewable Energy Credits (“RECs”) are environmental commodities which represent a megawatt-hour (MWh) of electricity generated from a renewable energy source. So if a energy source creates a MWh of electricity from solar electric, wind, geothermal, non-dam Hydropower, Biomass, biofuels, landfill to gas or non-hydrogen fuel cells, they also generate a REC.

There are 25 States who have set rules which mandate that a percentage of electricity sold must come from renewable energy sources. There is also a voluntary market which offers RECs to electricity purchasers (businesses and individuals) as clean energy.

The problem is that prices vary significantly. There is a list of retail providers that range from $5 to $56 a MWh. This site provides prices for RECs. It gets better, most local utilities will sell you a REC for $45 per MWh.

Why discuss this?

Two reasons –

1)      The American Clean Energy and Security Act of 2009 has a renewable energy requirement (read REC) of 6% in 2012 and rises to 25% in 2025. RECs are a major part of the new legislation

 2)      RECs can be priced out to equate to offsets – based on your grid

 The chart below compares the price of RECs to offsets based on VERUS’s  current per metric ton price:

 CLICK TO ENLARGE

Until you can get a real price on RECs you’re better off buying offsets.