US Carbon Markets Update

By Heike Lueger
Chief Environmental Scientist, Carbon Solutions America

The US carbon markets followed suit in the economic downturn crumbling to all time lows over the past few months. Still, climate change legislation is a large driver of market movements and investors, traders and brokers are scurrying to take advantage of current developments. Carbon prices are recovering visibly, especially in the EU where carbon prices have risen again over the last couple of months.

There is a strong belief that the US will establish a cap and trade system within the next few years. It is also widely believed that the US will re-enter international agreements on climate change and an announcement is expected before the Copenhagen meeting in December 2009. This meeting will produce the next international regulatory protocol replacing the Kyoto Protocol which formally ends in 2012. However, expectations for the new Copenhagen Protocol to result in meaningful climate change agreements are comparatively low due to economic concerns. On the flip side, a recent study suggests that about 72% still believe that there will be a global price on carbon in the near future.

A mandatory market is a very likely scenario under the new administration. Contrary to wide beliefs, the US has already introduced its first mandatory cap and trade system with the establishment of the Regional Greenhouse Gas Initiative in September 2008. This program set an emission cap for utilities and requires them to reduce emissions 10% below 2009 by 2019. To date, three auctions generated over $262 million and the current price is at $3.51/ton CO2e. The funds are used for energy efficiency (EE), energy conservation, and clean energy development - the last auction allocated over 75% of funds to EE.

At the end of March, Democratic Congressmen Henry Waxman and Edward Markey of the U.S. House of Representatives introduced The American Clean Energy and Security Act of 2009 (ACES) which features a fairly ambitious cap and trade system. Key elements include capping emissions to 17% below 2005 levels by 2020 and 83% below 2005 levels by 2050; however details have not been provided yet if allowances will be auctioned or given away. As with all cap and trade systems, fossil-fuel fired utilities will be the first targets of emission caps starting in 2012. This will be expanded only two years later to include other industrial sources. The system will create a mandatory carbon market which foresees the offset use of up to 2 billion tons carbon dioxide equivalent. Project types have yet to be defined, but it is likely that forestry, landfills and manure projects will be amongst the eligible projects.

Currently, there are several registries emerging which all have different levels of requirements and eligibility tests. To date there is not one dominant standard, but the movement is clearly from standards to registries. This year alone, three major standard organizations have established APX registries which facilitate carbon credit tracking and trading (Climate Action Reserve, Voluntary Carbon Standard, and American Carbon Registry).

The Climate Action Reserve (CAR) appears to be well situated within a governmental framework. It is a spin-off program of the California Climate Action Registry which was created by California state legislation in 2001. The program is also endorsed and accepted by the State of Pennsylvania and several environmental NGOs. The CAR organization is performance standard based rather than project specific. Activities are eligible that fall under a certain category or project design as laid out by the respective protocol. This is in contrast to CDM methodologies where a demonstration of barriers needs to be included in the project application (significantly increasing waiting times). CAR project protocols include forestry, landfill gas and agricultural methane capture. Several other protocols are in the planning stages such as truck electrification. Certified projects are listed on the registry and generate Climate Reserve Tons (CarRoTs). There are 41 projects under development o r registered and the credits are traded on average for $10.20/ton CO2e. CAR will be a significant player in future cap and trade systems.

The Voluntary Carbon Standard (VCS) was introduced about 2 years ago and opened its APX registry in March 2009. Eligible projects include agricultural land management and forestry (as part of their Agriculture, Forestry and Land Use -- AFOLU -- program), renewable energy and fugitive emission reduction. An interesting development of the AFOLU methodologies is that the issue of permanence is addressed by creating buffer accounts which will protect from catastrophic losses (e.g. forest fire). For new methodologies the double approval process promises to increase scrutiny and expedite method acceptance. Unlike CAR, the VCS allows for project eligibility rather than requiring a performance standard. The VCS does accept CAR and CDM based projects, while this is not the case vice versa. There are 35 projects registered on their registry and prices range around $8/ton CO2e. This standard is certainly backed up by an impressive roaster of companies and with growing volume is incre asing its momentum in the US.

The Gold Standard (GS) considers itself as a premium standard yielding high end prices in the markets of up to $40/ton CO2e for some projects. Projects certified to stricter standards will always have a higher value compared to less stringent standards and it is estimated that GS projects yield a 5-15% premium. It has the strongest support by NGOs and is predominantly active in developing countries. Currently, there are less than a handful of US projects. The project application process is more stringent. Accepted projects include renewable energy (small hydro, wind, solar, geothermal), energy efficiency, biogas electricity (landfills, wastewater treatment), and biodigesters.

CAR or CDM based methodologies are likely to prevail in a mandatory market - maybe more so than other standards - but the final design of offset standards is not clear yet and may even lead to a consolidation of existing standards.

Prices quoted here are certainly subject to debate due to the non-transparent nature of this commodity market. Studies indicate, however, that both the global and the US market are gaining in significance. The mandatory CDM market reportedly grew to $118 billion in 2008 leaving no doubt that there is a flurry of activity. Meanwhile, the voluntary carbon market reportedly grew 150% per year (2002-2005) by conservative estimates and the total global market is expected to grow to $150 billion in 2009 in spite of the global recession. Similarly, the voluntary CCX market shows impressive turn-over volumes which have been steadily increasing over the last few years. The Over-The-Counter (OTC) market is less transparent, but some figures suggest that retail prices on the OTC market has gone up from $8.04/ton CO2e in 2006 to $11.3/ton CO2e in 20071. A recent EPA analysis of the Waxman-Markey bill projects carbon prices of $13 - $17 per ton CO2e by 2015 and up to $22 per ton CO2e b y 2020. Projections are less clear on the effects of a cap and trade system in the US economy, but a few analysts predict it only to have a minor impact. It seems reasonable to assume that a carbon market will be introduced very soon and will be the swifter solution compared to a less flexible imposed carbon tax.

Contact: Heike Lueger, Chief Environmental Scientist, (561) 953-8960, Carbon Solutions America, heike@emailcsa.com, www.carbonsolutionsamerica.com