Cap and trade is back in the international news. The thing about polarizing topics is they create strange bedfellows. In Australia, their cap-and-trade bill has been waylaid by a joining of big business interests who believe that the bill would be too onerous and green groups who feel it would be too lenient (sound familiar). In Europe, the mandatory system initially gave out too many permits and suffered from a slow start. Ok, so reducing CO2e is messy and no special interest group will ever be happy, but cap-and trade is the best game in town.

The key is to make the game fair. Make the rules too lenient for some and we don’t combat climate change.  If the rules are too strict, it’s tough on the economy (at least in the short term). There are going to be big hurdles and a learning curve.  We’ll get over them and grow stronger in the process.

The Nature Conservancy just came out with an analysis of state-by-state temperature increases if the current trend continues. Their analysis shows the annual average temperature in Kansas, Nebraska, Iowa and South Dakota all increasing 10 or more degrees Fahrenheit-ever been to these states in July?.  Another 15 states will see between 9 degree and 10 degree increases. No one gets off easy in this report.

According to the report temperature changes may cause:

• Shifts in the optimal zones for growing certain crops;
• Milder winters and earlier springs could exacerbate outbreaks of insect pests
• Water sources could become taxed as aquifers are depleted and soil moisture declines.
• Hot summer temperatures could arrive three weeks earlier and last three weeks longer in the Northeast, with more days averaging above 100 degrees Fahrenheit.
• In the Northwest, higher temperatures could contribute to earlier spring snowmelt, increasing the risk of forest fires and summer drought.
• Water could become more and more scarce in the Southwest as temperatures climb and spring snowmelt declines.
• Rising sea levels and increased storm surges could threaten low-lying coastal areas in the Southeast.
• A 2.7 to 4.5 degree Fahrenheit increase in global average temperatures threatens to put 20 to 30 percent of the Earth’s plant and animal species at greater risk of extinction.

So we have a pretty good picture of what happens if we don’t win the game. We’ll never agree on all the rules and just like all games the rules will need to be changed.  The sooner we start playing the better chance we have of winning.

Cash for Clunkers is put to bed. The government will pay out $2.877 billion to replace 690,114 Cars. This breaks out to 462,511 payments of $4,500 and 227,613 payments of $3,500. The average improvement is 9.2 MPG. That translates to 191.5 million gallons of gas and 1.7 million metric tons of CO2e per year. For perspective this is equivalent to the carbon dioxide taken in by 386,329 acres of pine forests per year or a forest 18 times the size of Manhattan.

Eighty-four percent of the trade-ins were trucks while less than half, but only forty-one percent of the new purchases were trucks. State by state, the biggest outliers were Alabama and Minnesota.  Alabama ranked 31^st in the number of people that utilized Cash for Clunkers, but ranks much higher when it comes to the number of total vehicles registered (20^th). Minnesota, on the other hand, ranked 13^th in use of Cash for Clunkers, but only ranks 22^nd in total registered vehicles.

Not bad - the plan worked

How could the program be improved?  Raise the average fuel mileage improvement to 10 MPG and then we would save 203.2 gallons of gas and 1.8 million metric tons of CO2e per year.

As we tell anyone that will listen to us, in the U.S. we use offsets from the Chicago Climate Exchange. We can have confidence that these offsets are verified, certified and registered. We can know that the projects were reviewed by an independent-third-party verifier. We know that they are only sold once, the standards/protocols for the offsets are uniform and acceptable, and the price is efficient with the market.

It’s easy to look up the CCX protocol on their website. We can get a listing of all the projects. Also, when making  trades we know we will get what we bought.

We have been asked (or more importantly our clients have been asked) about the protocols for calculating the offsets on the exchange. We were reassured that the Chicago Climate Exchange was the preeminent place for offsets when seven of the eleven best offset projects listed by an Environmental Defense Fund report were listed on the exchange. Now we can add another notable recommendation, the EPA:

The Stockholm Environment Institute wrote a report in June 2009 comparing offset protocols.  The report examined U.S. EPA Climate Leaders’ protocols for landfill methane, manure digesters, and afforestation project types, comparing them with the current versions of protocols developed for four other offset programs: the Clean Development Mechanism (CDM), Regional Greenhouse Gas Initiative (RGGI), California Climate Action Registry (CCAR), and Chicago Climate Exchange (CCX).

It’s important to note that each protocol has a unique set of standards that often yield different results when measuring amounts of CO2 that is offset from a project. For example: When a total of six projects were examined by the CCX and EPA Climate Leaders, the CCX (as compared to the EPA) provided more offsets for three of the projects and fewer offsets for the other three projects. In other words the two protocols balanced out. Compared to RGGI, the CCX was more stringent on four occasions, equal in one and less so in one.  CDM only covered four of the six project types and was more strict on three and equal on a fourth. CCAR only covered three project types and was stricter on all three. The key in these measurements is that the differences were not very large.

Another important aspect of the report is the number of projects listed under the protocols. This can signify if a protocol is too strict. For example, if you create forestry protocol that says you cannot cut down trees for 100 years it is too difficult on the land owner. Therefore the protocol is not only too “strong” but it’s also useless.  For Forestry, CCAR has no projects listed; CCX has more than 25 projects listed, and the CDM has 39 project waiting. For landfill methane, the CCX and CDM have more than 30 projects listed, CCAR has 14 and RGGI has none.  For Manure Digester, the CCX and CDM have over 35 projects, CCAR has 12, and RGGI has none.

The CCX protocols are clearly the right mix of strict and manageable. This makes sense for a trading market. The protocol must come to the market as that is where action occurs. Once again, economics makes sense - the trading market defines the protocol not the other way around.

I like it when people agree with me.  The latest word on cap-and-trade legislation is to get a bill passed first and then refine it afterwards. This is according to the co-author of the current bill, Representative Henry Waxman.  It’s really a page right out of Europe’s cap-and-trade history and will be the case in any democracy. We are not China. Let’s pass the legislation and then raise the goals.

I’ve always been a big proponent of the pass something first-think about how much farther along we’d be if we passed a similar bill in 2008. I believe that consumers can reduce their energy usage by focusing on it. We have seen great strides in CFL usage in the home. We are seeing true action in the auto industry towards mass marketed electric cars. We are definitely seeing the use of solar panels and wind power increasing.  All of these actions add up.

Look at the history lesson learned from the Acid Rain cap-and-trade system: In 1995, the Clean Air Act set a goal of reducing annual SO2 emissions by 10 million tons below 1980 levels and reducing NOx by 2 million tons from 1980 levels. Based on EPA’s latest air quality trends data the national composite average of SO2 annual mean ambient concentrations decreased by 9.7 million tons (44%) between 1980 and 2008. This saved billions in health costs.  The Environmental Defense Fund wrote about its successes as follows:

The expected market price for SO2 allowances was in the range of $650-$850 (in 2000 dollars). The actual market has been between $100 and $200 for most of the program.

In the 1990s, the U.S. acid rain cap-and-trade program achieved 100 percent compliance in reducing sulfur dioxide emissions. In fact, power plants took advantage of the allowance banking provision to reduce SO2 emissions 22 percent (7.3 million tons) below mandated levels for the first phase of the program.

On the eve of legislation, the EPA estimated that the program would cost $6 billion annually once it was fully implemented (in 2000 dollars). The Office of Management and Budget has estimated actual costs to be $1.1 to $1.8 billion — just 20 to 30 percent of the forecasts.

The takeaways are straight forward: a) markets adjust quickly, b) cap and trade works and c) pass something now and adjust it later.

China is the largest emitter of greenhouse gases in the world. They surpassed the U.S. in 2007. China emitted 1.8 billion metric tons of CO2e a year as of 2007, the U.S. emitted 1.6 billion metric tons of CO2e. There have been discussions that if the U.S. were under a Cap-and-Trade system we would need to enact tariffs on Chinese goods in order to level the playing field. Carbon Dioxide caps would raise the cost of U.S. goods and any country that is not accounting for this would have an advantage. Fortunately, Europe has not yet placed any new tariffs on the U.S. as a result of their mandatory Cap and Trade.

China contends that they are developing and their per-capita emissions are significantly lower than the U.S. levels. The US was at 19.0 metric tons per capita in 2006 while China was at 4.6 metric tons per capita. By the way, the largest per capita was Qatar at 56.2 metric tons. Some others worth mentioning are Australia (18.1), Canada (16.7), Russia (10.9), Japan (10.1), UK (9.4), and France (6.2).

Reuters just reported that China has come out with a report urging, “quantified targets to cap greenhouse gas pollution marks.” This is a major step as the Chinese have previously avoided discussion about being the largest emitter of greenhouse gases in the world. Further, the report, called “2050 China Energy and C02 Emissions Report,” looks at a peak of CO2e in 2030 and a reduction to 2005 levels by 2050.

The report also defines a track that can reduce emissions from a current business-as-usual peak of 3.5 billion metric tons of CO2e in 2040 to an enhanced-low-carbon path that peaks at 2.2 billion metric tons of CO2e in 2030. This is a clear call to action that reacts to potential problems from climate change.

What does this mean?

Well, many things - first China is setting the stage for some kind of action on Climate Change. Second, China is not that far away, from where the U.S. is on Climate Change. The U.S. has a Cap-and-Trade bill passed in the House of Representatives but needs to go through the Senate. China, by its nature, could pass something as quickly (or slowly) as the central government decides.

Third and most important, by defining its position China has made a major step towards its inclusion in upcoming negotiations of a follow up to the Kyoto Protocol which is due to expire 2012.

Big Oil companies say they are fighting Climate Change.

“BP has a decade-long track record of advocating and taking precautionary action to address climate change”

Royal Dutch Shell: “We were one of the first energy companies to acknowledge the threat of climate change. We are calling for action by governments, our industry and energy users. But we are also taking action ourselves - by playing a leading role in demonstrating ways to manage CO2 responsibly. Our target now is to reduce emissions from our operations in 2010 to a level at least 5% lower than in 1990.”

Exxon Mobil on Climate Change: “Managing the risks from increases in global greenhouse gas emissions is an important concern for ExxonMobil, industry and governments around the world.”

Then we see the American Petroleum Institute trying to organize rallies to defeat climate change legislation. Well the memo wound up in the hands of Greenpeace OOPS!

The institute is a trade association of “nearly 400 corporate members, from the largest major oil company to the smallest of independents, come from all segments of the industry. They are producers, refiners, suppliers, pipeline operators and marine transporters, as well as service and supply companies that support all segments of the industry.”

So, the largest Oil Companies are publicly supporting Cap and Trade. They are accepting the importance of legislation. They are also funding a pretend grassroots movement to stop the same legislation.

I try not to believe in conspiracies but…

Please look at our latest interview:

http://renewableenergymemo.com/pages/interview.php

The New York Times recently wrote an article Climate Change Seen as Threat to U.S. Security, it discusses how the effects of Global Warming will destabilize parts of the globe and create new international challenges. These warnings are coming from the US “military and intelligence analysts,” the Pentagon, and the State Department.

We also know that use of renewable energy, one of the solutions to Climate Change, is a way to decrease dependency on foreign oil. We stabilize our energy sources and reduce our need to buy oil from places like Iran, Venezuela, Saudi Arabia, Russia….

Fighting climate change is important. But why Cap and Trade? Why not just a tax?

Because Cap and Trade is capitalism! Taxation is just government intervention.

Under Cap and Trade, businesses can create as much CO2 emissions as they want but have to clean up their own mess. When they offset their “mess” the money goes to reducing CO2. In other words, it goes to projects and technologies that reduce greenhouse gases. Tax money goes into the government to pay for whatever the government sees fit to spend it on.

Lets say CO2e offset price is $10 a metric ton. Chemical company can reduce by 100,000 metric tons of CO2e below its cap by spending $500,000 on a new technology. It will do so and sell the 100,000 metric tons and net $500,000 ($1 million from sale of offsets - $500,000 spent on the technology). If enough companies buy into the new technology chances are costs will go down.

Meanwhile, an electricity generation company may have to spend $2,000,000 and reduce emissions by only 100,000 metric tons of CO2e-not a good business decision.  Instead, they buy CO2e offsets from the Chemical Company for $1,000,000.

The whole economy wins! We have reduced 100,000 more metric tons than before and spent fewer dollars to do it. Simple.

I wrote about Cash for Clunkers and heard the criticism from the media.  This has been articulated in a Reuters Article How ‘Cash for Clunkers’ is Adding Carbon.  The 4 basic points are:

• 1) Not high enough fuel economy
• 2) New car drivers like to drive more than they did in their old cars (i.e. joy-riding)
• 3) Purchases are being accelerated due to incentives
• 4) Clunkers buyers don’t need incentives

These reasons sound ridiculous to me.

Not High Enough Fuel Economy - some people are never satisfied. The trade in has to have 18 MPG or worse. The top ten trade-ins averaged MPG of 16.4. The top ten new cars average MPG of 29.7. What do they expect? This is significant.

Joy riding and accelerated new purchases are tied together.  Yes, we do drive new cars more than old cars - but if purchases are being accelerated then we would have driven the new car more at a later date. You can’t have it both ways. This is the problem with glass half full thinkers - they ignore the laws of large numbers.  When the EPA says we drive 12,000 miles a year on average it is taking into consideration new car purchases as well as existing car purchases. Further, the assumption is that new cars are more efficient so the overall universe of mileage will be the same but the MPG will be improved.  Lastly, the benefit is about next year and the years after.

Clunker buyers don’t need incentives?  Well they must if they weren’t going to buy unless they received them. But let’s say they did not need to be induced, the $3,500 to $4,500 spent is stimulus to entice them to buy it sooner.  These cars are over 10 years old - why were these frugal owners going to purchase a new car-in a year when we really needed them to? If you are focused on being economical do you buy during a recession or do you wait?

This is the best country on earth. I appreciate that everyone has an opinion - even when they are wrong.