Climate Action - Assisting business towards carbon neutrality

Source: New Carbon Finance

A proposed change to the Lieberman-Warner climate bill, scheduled for a Senate vote on 2 June 2008, could alter the face of the future global carbon market by unilaterally linking the US to the international carbon trading put in place by the Kyoto Protocol. Through its proposed changes, the so-called Boxer amendment would greatly increase the chances that US carbon prices remain below $25/tCO2e until at least 2020 compared to prices of $45-50/tCO2e if the climate bill remains as is. This may be the crucial cost containment needed to pass climate legislation in times of rising fuel costs and lower economic growth.

Costs are limited by allowing US entities to import up to 1,733Mt/yr of international offsets, or the equivalent emissions of almost 290 coal-fired power stations. This would ensure continued growth in the $13 billion market for Kyoto’s CDM/JI projects, a market that faces an uncertain future post-2012. It would also spur a boom in international forest conservation and restoration activities, an area so far neglected by the EU and other Kyoto signatories. Although the import of CDM/JI credits would be limited to 290Mt in 2012, international forestry credits could supply the US up to 1,450Mt, primarily dependent on the existence of national emission reduction commitments in other countries. On the flip-side, this would also mean that the US would not have to reduce emissions domestically until at least 2030 and could import all emission reductions over the next two decades.

“Participating in a global market will help keep a lid on the price paid by emitters and ultimately by consumers in the US. Adequate supply of international offsets will in large part depend on how early and how clear a signal the US Congress sends to project developers and financiers worldwide,” Milo Sjardin, Head of New Carbon Finance North America, comments. “While opportunities for abatement are not lacking—New Carbon Finance sees 4,000Mt/yr of potential for international offsets (including afforestation/reforestation) plus another 1,500Mt/yr for avoided deforestation—these will not be developed if future demand for these credits remains uncertain.”

At present, the largest buyer of international offsets (the EU) is contemplating cutting its demand for Kyoto credits after 2012 by as much as 100% (from roughly 280Mt/yr down to 0Mt/yr) in the absence of an international framework. The current amendment would therefore prevent a marked fall off in project development activity in developing countries and ensure that this fast growing $13 billion market continues to exist.

The impact on the global forestry sector will be even larger. Afforestation/reforestation projects are shunned by the EU ETS and neglected by other buyers, and avoided deforestation projects are only accepted in the small voluntary market (in 2007 5% of the $331 million market, see “Forging a Frontier: State of the Voluntary Carbon Market 2008”). The import of 1,450Mt/yr means that almost 100 million hectares of land, or one tenth of the land mass of the US, would need to be afforested or reforested or global deforestation rates halved to deliver this quantity of emission reductions.

Passage of the amended bill would ensure US demand for international offsets, but only for projects involving facilities deemed to not be in competition with US ones and sources of international forestry credits would only be limited to countries implementing carbon controls. In other words, passage of the amended bill would only take its full effect in conjunction with an international climate agreement revealing countries’ post-2012 carbon constraint commitments.

“Rather than putting a cap on the carbon price, as suggested by some parties, this solution would be an effective means to limit the cost to the US economy provided that enough countries put in place carbon constraints.” says Emilie Cassou, Associate at New Carbon Finance. “In addition, it would produce a wealth of opportunities for companies and investors within the global forestry sector, an area that has until now received little attention from the investor community.”

America’s Climate Security Act, co-sponsored by Senators Lieberman (D-CT) and Warner (R-VA), heads to the Senate floor next week. No other law aiming to establish a sweeping cap-and-trade programme to curb US greenhouse gas emissions has come this far since 2003, when the Senate voted against such a proposal by a large margin. Although New Carbon Finance does not expect the Lieberman-Warner bill to pass this year, it could shape a new statute as early as 2009, the same year a new US president favoring cap-and-trade will take office and an international climate protection agreement is expected to emerge from a UN summit in Copenhagen.