Chapter 4 Carbon Credits as a Currency for Project Finance
E. Projections of the Future Price of Carbon
Projections of the future price of carbon fall into different categories and are produced through rigorous academic study and complex economic modeling, as well as through carbon market participant surveys.
125 Joseph Aldy and Robert Stavins, supra note 100, at 4.
126 John Llewellyn and Camille Chaix, The Business of Climate Change II (Lehman Brothers Sept.
2007), at 46–52, http://gei.newscorp.com/resources/fi les/lehman--thebusinessofclimatechange.
pdf .
127 Id. , at 46.
128 Id. , at 47.
ADDRESSING UNCERTAINTY AND MANAGING RISK IN CARBON CREDIT MARKETS
1. Social Cost of Carbon The concept of the “social” or “damage” cost of carbon represents the tax or other price that, if charged to those who emit greenhouse gases, would both raise the requisite revenue to compensate those damaged by the emissions and encourage the reduction of emissions. It is regarded as one possible benchmark against which to assess every climate change policy that does not explicitly attach a price to carbon. 129 There have been a wide range of estimates of the social cost of carbon; the earliest was in 2002, when the U.K. Department for Environment, Food, and Rural Affairs (DEFRA) published a review based on nine major studies. 130 It rec- ommended a value of £70 ($140)/tonne of carbon — with a range of £35 to £140/tC — increasing by approximately £1 ($2)/tC per year in real terms to account for increasing damage costs over time. Nordhaus, 131 using a Dynamic Integrated Model for Climate and Economy (DICE), estimated the “social” cost of carbon at around $28/tC in 2005, rising to $90/tC in 2050 and to $200/tC in 2100, if an optimal policy is implemented.
R.S.J. Tol (2004) 132 combined 103 estimates to produce a probability-density function.
He found the modal value to be $2/tC, the median value to be $14/tC, the mean to be
$93/tC, and the 95th percentile $350/tC. Tol concluded that marginal damage costs — i.e., the social cost of carbon — “are unlikely to exceed $50/tC.” 133 The Intergovernmental Panel on Climate Change (IPCC) 134 more recently judged that the social cost of carbon that would be required to stabilize atmospheric GHG concentrations at around the presumed-critical level of 550ppm of CO2, would lie between $70 and $290/tC by 2030, but perhaps between $18 and $240 were there to be significant “induced techno- logical change.” John Llewellyn (2007) summarized these studies and described a central working estimate of the social cost of carbon of $50 per tonne (EUR 40), rising to perhaps $100 per tonne by 2050 (EUR 80). 135
2. U.S. Federal Carbon Price Of the wide range of cap-and-trade proposals in the U.S. Congress, price-path scenarios reflecting the range of stringency of these bills were analyzed in an MIT Joint Program on the Science and Policy of Global Change Study. 136 The study found that the proposals with goals of substantially cutting U.S.
emissions between now and 2050 would likely generate prices in the range of $30 to
129 Id.
130 R. Clarkson and K. Deyes, Estimating the Social Cost of Carbon Emissions , Department for Environment, Food, and Rural Affairs (2002).
131 W. Nordhaus, THE CHALLENGESOF GLOBAL WARMING: ECONOMIC MODELSAND ENVIRONMENTAL
POLICY (Yale University 2007).
132 R.S.J. Tol, The Marginal Damage Costs of Carbon Dioxide Emissions: An Assessment of the Uncertainties , 33 ENERGY POLICY , 2064–74 (2004).
133 Id.
134 CLIMATE CHANGE 2007: MITIGATION. CONTRIBUTION OF WORKING GROUP III TO THE FOURTH
ASSESSMENT REPORTOFTHE INTERGOVERNMENTAL PANELON CLIMATE CHANGE (Bert Metz et al.
eds., Cambridge University Press 2007), available at http://www.ipcc.ch/ipccreports/ar4-wg3.
htm .
135 John Llewellyn and Camille Chaix, supra note 127.
136 Sergey Paltsev et al., Assessment of U.S. Cap-and-Trade Proposals , MIT Joint Program on Science and Policy of Global Climate Change Report 146 (Apr. 2007), at 22.
$55 per ton of CO 2 -e in 2015, rising to the range of $120 to over $200 by 2050, 137 while proposals that aim to slow or stop the rise in emissions, but not substantially cut them from today’s levels, would generate somewhat lower prices. According to the study, a policy that froze emissions at 2008 levels would generate a price of $18 per ton of CO 2 -e in 2015, rising to around $70 by 2050. Related proposals specify a safety valve of $6 per ton of CO 2 -e rising to $39 by 2050. 138
A separate MIT study examines the effect of carbon prices on coal consumption under three carbon price paths. The price paths are applied uniformly across all regions beginning at low, politically plausible levels in 2010 and rising over time. In the low price path scenario, carbon emissions are penalized at $10/tC beginning in 2010 and initially rise by 9 percent per year and stabilize at US$300/tC by 2100.
A mid price path scenario begins at a more aggressive $20/tC and rises 10.5 percent per year to reach $340/tC in 2050. This price path approaches $450/tC in 2100.
The high price path scenario also begins at $20/tC and increases to $500/tC by 2050. 139
Point Carbon’s 2009 survey found that 72 percent of their sample thought that there will be a global reference carbon price in 2020, and the most frequently chosen reply as to what price that would be was 35 to 40 US dollars. 140
VII. CONCLUSION
An important achievement of the carbon market is the provision of an additional financing mechanism for GHG reduction projects. Diverse structures have evolved which allow carbon credits to better contribute to project finance by providing carbon price certainty and risk management. A significant challenge faced by carbon market participants is the lack of future regulatory certainty, which is necessary for developers and financiers to factor a price of carbon into long-term investment decisions. Recent developments in global discussions on the future of an international climate change agreement post 2012, the EU’s commitment to extending the EU ETS to 2020 irre- spective of the outcome of discussions on a global climate change agreement as well as US congressional efforts to pass federal climate change legislation are positive signals for the future of a regulated carbon market.
137 Id. , at 52.
138 Id. , at 53.
139 MIT, The Future of Coal Consumption in a Carbon Constrained World (May 2007), at 22.
140 Point Carbon, Point Carbon Insights 2009 (Mar. 2009).
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Developing Markets for Renewable Energy Certifi cates and Their Impact on Project Finance
Gregory K. Lawrence and Athena Y. Velie *
I. AN INTRODUCTION TO U.S. RENEWABLE ENERGY CREDIT MARKETS
Renewable energy credits (RECs) have become an integral part of how electricity is traded in the United States. A REC, simply put, represents the renewable attributes associated with one megawatt-hour (MWh) of energy generated by a renewable resource. RECs are assigned a “vintage” based on the year in which they are generated, and are described in terms of their resource type (such as, California wind RECs) and/
or market eligibility (such as, Class I New Jersey RECs).
Although they are administratively created products, RECs are subject to supply- and-demand principles, and can be bought “forward” and sometimes “banked” in the market in anticipation of forecasted price trends for specific REC types. RECs cur- rently are bought and sold through bilateral contracts and also form the basis of futures contracts traded on the Chicago Climate Futures Exchange (CCFE). Moreover, title to and the attributes associated with RECs often are tracked electronically through gen- eration information systems administered by organized wholesale power markets.
RECs have value to investor-owned utilities and certain retail marketers that have obligations to demonstrate compliance with state mandatory renewable portfolio stan- dards (RPS). They also have value to a variety of entities that want to demonstrate to the public that they operate a “green” business or process. Renewable generation
* Greg K. Lawrence and Athena Y. Velie are partners in the law fi rm of McDermott Will &
Emery LLP, and members of the fi rm’s Global Renewable Energy, Emissions, and New (GREEN) Products Group (mwe.com/green). The views expressed herein are solely the views of the authors. The authors wish to thank Melissa Dorn, an associate with the fi rm, for her signifi cant contribution to this chapter.