CARBON MECHANISMS, MARKETS, AND PROJECTS

The Climate Trust Sean Penrith, Executive Director

Portland-Kunming Exhibition Kunming Urban Planning Exhibition Center

122 Tuodong Rd, Panlong, Kunming, Yunnan China

October 22, 2014

Transforming the economy to value our climate

Framing

¨  Low carbon policies & programs improve health, energy security, and deliver economic gain

¨  Offer revenue opportunity to state/provinces/countries that administer such programs

¨  Stimulate low carbon entrepreneurship in multiple project sectors

¨  Help transition to a low carbon economy, now

2

About

¨  We are a carbon fund manager for Oregon’s existing mandatory and voluntary ($43 million) commitments to emissions reduction

¨  16 years of expertise in climate solutions for utilities, businesses, and governments

¨  Created in 1997 in response to the passage of the Oregon Carbon Dioxide Standard

¨  Establish & maintain processes for the evaluation, verification and funding of carbon mitigation projects for both compliance & voluntary markets.

¨  Work nationally & internationally ¨  Focus on agriculture, livestock, forestry

and energy efficiency sectors

3

Basics of Cap & Trade 4

Offsets can be used for compliance (up to 8% in CA, 3% in REGGI)

GHG Emission Trading Globally 5

•  China has 7 pilot regions underway ending 2016

•  National ETS planned for 2018

•  Regional schemes have been illiquid

What is a carbon offset?

A carbon offset is the reduction or sequestration of carbon dioxide or greenhouse gas made to compensate for or offset emissions produced elsewhere

China’s pilot carbon prices in line with EU ~5.7 Euros/ton

7

Offsets Should:

¨  Be real, independently verified, with clear ownership

¨  Be additional & address leakage ¤ Demonstrate that offset funding incentivized the

implementation of the reduction project

¨  Have a realistic baseline & address permanence

¨  Be quantified and monitored

Oregon’s Carbon Dioxide Standard 9

1. Reduce at site

1997: Reduce CO2 17% below level of best gas combustions-turbine plant in the US over lifetime of the plant

2. Directly manage offset projects

3. Pay a “Qualified Organization” to manage offset projects New energy facility

The Climate Trust’s Role 10

3. Pay a “Qualified Organization” to manage offset projects

S&C •  Select projects for review & due diligence •  Enter into Emissions Reduction Purchase Agreement (ERPA)

PM •  Ensure adherence to recognized protocol for credits generated • Monitor carbon credit stream that results from selected projects

CO2

• Offsets verified by 3rd party •  Pay for the credits on delivery •  Retire the credits on behalf of the energy facility

Oregon Department of Energy oversees TCT

Monetary Pathway calculates the $ amount

$0.23 per metric ton

$0.92 per metric ton

CURRENT MONETARY PATH RATE

Offset management funds

Offset funds

TCT Business Model Producers cannot take carbon market risks. Aggregators must structure business models that take on that risk.

Aggregation of Greenhouse Gas Emissions Offsets: Benefits, Existing Methods and Key Challenges. Electric Power Research Institute, Palo Alto, CA: October 2011.

Participants"Carbon Market"Fund

Manager"

Carbon Fund Manager 12

Oregon

Retire on behalf of the energy facility that pays into the fund via Monetary Pathway

Colorado Carbon Fund (CCF)

Retired on behalf of the

citizen or corporation that

pays into the fund

NW Natural Smart Energy

Retired on behalf of the

contributing gas utility customer contributing $

Energy Agriculture Forestry Livestock

TCT U.S. Projects

13

•  33 active project in 8 sectors •  Average cost to retire $4.32/ton •  Plan to retire another 4.2 million tons equal to

950,000 passenger vehicles taken off the road

Carbon Credit Management 14

Credit Supply

WA program

OR program

Smart Energy

Contract with projects for

credits

Retired Voluntary Market

Regulated Market

California’s  Assembly  Bill  32  

Source: California Air Resource Board. “California’s GHG Emissions – Forecast (2008-2020).” Updated October 2010.

2020  Emissions  (507  million  mtCO2e)  =  1990  Emissions  (427  million  mtCO2e)  =>  Reduce  2020  Emissions  by  80  million  mt  CO2e  

California  Cap  and  Trade  Program  

Source: Image from Fine, Steve. “The Interaction of Complementary Measures and the Cap & Trade Program under AB-32.” April 16, 2013 presentation at the EPRI-IETA Joint Symposium GHG Offsets Policy Dialogue in San Francisco, CA.

Offset Market Activity

¨  All years of market activity has reduced 844 MtCO2e valued at $4 billion ($5.9/tCO2e)

¨  Private sector energy, transportation, finance, and insurance sectors top buyers

¨  “Combatting climate change” – top buyer motivation.

FIGURE 7: TRANSACTED VOLUME BY PROJECT CATEGORY, OTC 2012 MtCO2e and % Share

Notes: Findings pertain to the 75.5 MtCO2e associated with a response to this question, including “N/A” and “Other”. Source: Forest Trends’ Ecosystem Marketplace. State of the Voluntary Carbon Markets 2013. * First Biennial report of the United States of America, 2014

Carbon offset projects types

FIGURE 24: MARKET SHARE BY PROJECT TYPE, OTC 2012 % Share

Notes: Findings pertain to the 75.5 MtCO2e associated with a response to this question, including “N/A” and “Other”. Source: Forest Trends’ Ecosystem Marketplace. State of the Voluntary Carbon Markets 2013.

Global Carbon Project Sectors

U.S. Offset Project Types

California Market

¨  Approved ¤  Livestock Digesters

¤  Forestry

¤  Urban Forestry

¤  Destruction of Ozone Depleting Substances

¤  Coal Mine Methane (Apr 2014)

¨  Anticipated (October) ¤  Rice Cultivation

Voluntary Standards

¨  CAR: Climate Action Reserve (5%)

¨  ACR – American Carbon Registry (1%)

¨  ACR & CAR focusing on CA’s compliance market

¨  VCS – Verified Carbon Standard (29%)

Voluntary Market Pricing

Source: Forest Trends Ecosystem Marketplace. Sharing the Stage: State of the Voluntary Carbon Markets 2014.

PROJECT STAGE & VALUE

Source: Climate Action Reserve & Parhelion

Compliance Pricing (California)

Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 $5

$6

$7

$8

$9

$10

$11

$12

$13

$14

$15

$16

$17

$18

$19

$20

$21

$22

Golden CCO CCO (8 year buyer liability)

Current CCA (auction) ODS CRT & Livestock CRT & Forestry CRT

ARB Offset Credits Issued

Source: Argus Media, Sept 2014

Project Type Volume

Ozone Depleting Substance 5,406,692

U.S. Forest 5,997,317

Livestock 594,019

Urban Forestry 0

TOTAL 11,998,028

CA Offset Supply (Shortage?)

Source: Stevenson, Sam et al. American Carbon Registry. Compliance Offset Supply Forecast. April 2014

•  Over the California market's three compliance periods, total cumulative offset demand could reach just over 200 million tons.

•  Could be 67% or 134M short by third CP 2018-2020

Low Carbon Fuel Standard Overview

¨  Sets annual carbon intensity standard for gasoline, diesel and the fuels that replace them

¨  Carbon Intensity (CI) is the measure of GHG emissions associated with producing & consuming a fuel (gCO2e/MJ)

¨  LCFS goal in California is reduce CI of transportation fuel by at least 10% by 2020

¨  Regulated party: Tradition fuel refiners and importers ¨  Credit: LCFS Credit (1 mt CO2e reduced from target)

¤  Separate and distinct from carbon offset

¨  Sunset: 2020 -  2020 target applies until changed or rescinded

LCFS Accounting System 27

Fuels Generating LCFS Credits 28

•  ‘12 – ’14 ~1,8 million tons traded

•  Price range $10 - $85/MT

LCFS & Cap & Trade Policy Effect = Economic & Health Gain

29

•  Save $4.3 billion by 2020 and $8.3 billion by 2025 in California •  Reduce 167,000 tons of NOX (Nitrogen Oxide) •  Reduce 9,000 tons of PM2.5(Air Particulates) •  Reduce 3,850 tons of SOX (Sulfur Dioxide)

Health Benefits of LCFS 30

Renewable Fuel Standard 2

¨  Federal mandate on quantity of renewable fuel that is consumed for transportation in the US

¨  Regulated party: Transportation fuel refiners and importers

¨  Credit: Renewable Identification Number (RIN) ¨  Sunset: 2022

Multiple Environmental Credit Benefits 32

Transporta7on  Gas  Sales  

58%  

Bedding  1%  

Nutrients  6%  

Tipping  Fees  10%  

Carbon  Credits  2%  

RINs  10%  

LCFS  13%  

Environmental  Markets  25%  

RECs 8%

 $1,000,000    

 $1,500,000    

 $2,000,000    

 $2,500,000    

 $3,000,000    

 $3,500,000    

 $4,000,000    

 $4,500,000    

 $5,000,000    

2013   2014   2015   2016   2017   2018   2019   2020   2021   2022  

Annu

al  Net  Reven

ue  

Environmental  Markets  -­‐  High  Price  (IRR  =  34.36%)  

Environmental  Markets  -­‐  Low  Price  (IRR  =    15.30%)  

Baseline  -­‐  No  Environmental  Markets  (IRR  =    7.83%)  

Low  Carbon  Fuel  Standard  Credits  

Renewable  IdenOficaOon  Numbers  

Carbon  Credits  

Environmental Market Returns: 5,000 cow digester

Nexus: Agriculture, Carbon Markets, Finance Sector Potential Status

Anaerobic digestion. Installation of covered lagoon or enclosed vessel digesters at livestock facilities, avoiding methane emissions normally release from anaerobic lagoons.

22 million mtCO2e per year1

Compliance. Livestock digesters (anywhere in the US) qualify for California’s cap-and-trade system.

Grassland conservation. Avoiding the conversion of grassland into marginal cropland, maintaining carbon sequestered in soils.

2 million mtCO2e per year2

Voluntary. Voluntary protocol developed (with USDA CIG). First transaction to be completed in October.

Nutrient management. Increasing the efficiency of nitrogen fertilizer application, reducing emissions of N2O.

55 million mtCO2e per year3

Voluntary. Three major protocols. Pilot transaction only.

Switch to no-till. Decreasing the amount of soil tillage, maintaining carbon sequestered in soils.

138 million mtCO2e per year3

Voluntary. No modern transaction.

1 Carbon Prices and the Adoption of Methane Digesters on Dairy and Hog Farms. USDA Economic Research Service Economic Brief Number 16, Washington DC: February 2011. 2 Evaluation of Avoided Grassland Conversion and Cropland Conversion to Grassland as Potential Carbon Offset Project Types. Issue paper prepared for the Climate Action Reserve, Los Angeles, CA: December 2012. 3 Greenhouse Gas Mitigation Potential of Agricultural Land Management in the United States A Synthesis of the Literature. Second Edition. Nicholas Institute for Environmental Policy Solutions, Durham, NC: March 2011. Report NI R 10-04, page 26.

Project Case: Ducks Unlimited - Grassland Conservation

¨  The Climate Trust entered into forward contract to purchase tons from Ducks Unlimited

¨  Contract was then used to back the upfront payment to 100 landowners to enroll 50,000 acres in easements

¨  Ducks Unlimited offered landowners upfront purchase of carbon rights in exchange for easement rights

¨  Found that 13,000 of the 50,000 acres enrolled were additional.

¨  These 13,000 acres are anticipated to deliver 384,000 mtCO2e over a 10-year crediting period ~ $4 million

Photo : Amy Taborski. Ducks Unlimited. Sheridan County, North Dakota. June 2010.

Double Benefit of Biogas

Avoided Methane

Projects that digest eligible feedstocks and combust biogas

can earn carbon credits for avoided methane emissions.

First Merchant Food Waste Digester in U.S. 38

¨  TCT carbon credit purchase contract enables financing

¨  Facility built adjacent to composter and farm area that agreed to buy organic compost and fertilizer product from JCB

¨  JCB processes 25,000 tons/year of commercial organic waste & dairy manure from Portland, Eugene, & Corvallis areas

¨  Digester combusts the methane gas to generate 1.5 MW of baseload renewable energy.

¨  Exploring compressing methane gas to use as low carbon transport fuel

¨  10,000 tons of CO2 avoided per year equal to taking 2,000 cars off the road

¨  Received $2 million for RECs

Total market potential for U.S. dairies in bio-economy

39

Benefit of Suite of Credit Policies

¨  Complementary carbon mechanisms and fuel policies add: ¤  Economic gain ¤  Energy security, and ¤  Reduce negative health impacts ¤  Reduce CO2 emissions

¨  Can channel a portion of tax or cap and trade revenues to a special purpose fund manager for targeted reinvestment in multi-sector projects to support transition to low carbon economy.

¨  Due to China's growing consumption of dairy products and growth of Yunnan's dairy developing a competitive edge in Southwest China and for export to ASEAN neighbors, commercial scale biodigesters would be suitable.

¨  China ETS in 2018 will set the stage for offset project development opportunities.

Thank you!

Sean Penrith, Executive Director, spenrith@climatetrust.org