Green Tech

The first regulated carbon market in the U.S. will take its cue from eBay.

The Regional Greenhouse Gas Initiative (RGGI, pronounced "Reggie") is scheduled to go online September 10. It's a cap-and-trade system for carbon that electric power generators in 10 Northeast states need to participate in.

An online auction company called World Energy won the bid to write the software that utilities will need to use.

I spoke with World Energy Solutions to get a feel for the mechanics behind carbon trading at RGGI. In a nutshell, it's a blind online auction where power generators are competing for the cheapest price, in this case, a permit to pollute.

World Energy Solutions already has a business operating energy markets where electricity purchasers in deregulated markets buy contracts from suppliers. For example, a handful of representatives from power producers could compete during a half-hour-long online auction for a municipality's planned power purchases.

The way a carbon cap-and-trade system works is that participants have to purchase allowances that allow them to emit a certain amount of carbon dioxide.

These allowances can be bought and sold. So if a power generator buys the right to emit 40 million tons of carbon, but manages to fall under that threshold, the company can sell those credits to a power generator that has gone over their ceiling.

In the RGGI scheme, polluters will buy these allowances once a quarter and will base their purchases on what sort of weather they anticipate and kind of fuels they use.

The blueprint for the cap-and-trade system draws from a successful U.S.-devised system to cut down on power plant emissions that cause acid rain. The market-based mechanism is meant to be a more efficient and flexible alternative to government-set limits and more politically palatable than a straight carbon tax.

The elusive price tag
There's a lot riding on RGGI and carbon trading, in general.

Many environmentally oriented consumers are looking for some sort of action to address climate change.

Policy makers, meanwhile, appear to be coming around to the conclusion that regulating greenhouse gases will be more effective than voluntary goals for large polluters.

There are a number of federal carbon-restricting laws now being proposed, which many people in the power industry expect to take effect within the next five years.

What form these regulations take--and how they are initially set up--will go a long way to determining whether they succeed in stemming the growth of greenhouse gases. RGGI will be considered as a template for other regional carbon exchanges being established in the U.S., and potentially for a federal regime.

For businesses, the emergence of RGGI and other carbon trading markets that operate in Europe and Alberta, for example, mean that they have an additional way to make money from green technology.

The operator of a solar power plant, for example, can sell the carbon reductions that a project generates. Several clean-tech start-ups anticipate they will be able to monetize carbon credits with the products they sell.

But the big unanswered question, which RGGI should help clarify, is what is the price of putting a ton of carbon in the atmosphere?

Initially, the price for carbon on RGGI is expected to be in the $5 to $7 range, said Phil Adams, the president and chief operating officer of World Energy. That's roughly the same price for carbon the voluntary Chicago Climate Exchange but far lower than the current price on European markets.

Carbon-trading research firm CarbonPoint said that RGGI may be over-allocated. That is, there may be so many allowances for emitting carbon that the price for carbon will stay very low.

Adams said that the first round of RGGI won't be perfect. But at least it's a start, which can be modified over time.

Between now and September, his company is trying to get a grip on the logistics of getting 250 emitters to participate in a quarterly auction without too many glitches.

"Herding the cats is job No. 1," Adams said. "Job No. 2 is making sure that nobody gets their nose out of joint because he's looking for one misstep as an excuse to sue somebody."

Update at 8:50 PT: An astute reader points out that the Chicago Climate Exchange is already putting a price on carbon in the voluntary market, which is noted in the article. I changed the headline to clarify that RGGI isn't the first attempt overall at pricing carbon emissions in the U.S. It's expected to be the first regulated carbon emissions market to go online in the U.S.

A sampling of green-tech news thus far this week, touching on solar cells, carbon markets, biofuels, and electric cars.

• NREL: Record Makes Thin-Film Solar Cell Competitive with Silicon Efficiency
  Thin-film cells made from CIGS hit over 19 percent efficiency in NREL labs, rivaling traditional silicon.
• Shell, Virent form joint venture to convert crops to biogasoline | Chron.com/Houston Chronicle
  Forget ethanol. Here come hydrocarbons from plants. Shell and Virent to make 'biogasoline.'
• Technology Review: More-Powerful Solar Cells
  MIT spin-off 1366 Technologies (see Green Tech blog coverage) shoots for more efficient solar cells through manufacturing innovations.
• Pay for the Power, Not the Panels | The New York Times
  What's a PPA (power purchase agreement)? The New York Times explains how new forms of financing plays a critical role in getting solar adopted.
• JPMorgan acquires carbon offset firm ClimateCare | Reuters
  Carbon market consolidation. JPMorgan expands its environmental strategies by buying carbon offset company Climate Care.
• DONG Energy and California-based Project Better Place to introduce environmentally friendly electric vehicles in Denmark | Project Better Place
  Project Better Place has signed a letter of intent with Denmark to install a network of battery stations for electric cars, following a similar pledge from Israel.
• GreenFuel Nearly Finished with Phase One for First Commercial Factory | Greentech Media
  Possibly the first commercial-scale algae fuel plant.

Most Americans now agree that something needs to be done to reduce our greenhouse gas emissions. Hopefully most Americans now appreciate that this is not a small, but even more so, not a simple problem. I am a big believer that the playing field for our low carbon future should start level, and the market should be structured to allow our major power and energy companies a chance to lead the way, instead of simply dishing out punishment for our combined historical choices. Carrots and sticks work well together, but sticks alone are not going to solve our global carbon problem. I think it is also important to ensure that our carbon legislation does not result in a higher cost to consumers in middle America, just because the Midwest happens to have been historically coal fired, than the cost to those of us living on the coasts. Jim Rogers of Duke Energy puts this much more eloquently than I do.

Duke Energy (NYSE:DUK), one of the largest power companies in the U.S., has been a long supporter of energy efficiency, and known for being forward looking when it comes to a low carbon future, smart metering, and advanced energy technologies, despite having a generation fleet that is 70 percent coal fired. Cleantech Blog is delighted to welcome Jim Rogers, CEO of Duke Energy, to give us his thoughts on the devil in the details from their perspective. It is heartening to see a major power company take on the carbon issue full force, and like Duke has done, push energy efficiency in a big way.

- Neal Dikeman, Cleantechblog.com

By Jim Rogers Chairman, President and CEO of Duke Energy

As we debate our differences on how to address the challenge of global climate change, surely we can agree on the end-goal--a secure, sustainable and affordable supply of energy now, and for future generations.

Most Americans also agree that we must act now--and begin building a bridge to an energy-efficient, low-carbon economy.

As the third-largest coal consumer in the United States, and one of the largest greenhouse-gas emitters, Duke Energy has a responsibility to be part of the solution. That means looking at not only how climate change affects our business today, but also the implications for the future.

We support federal legislation to address global climate change by putting a cap-and-trade system in place. The U.S. Senate is in the process of vetting a cap-and-trade bill introduced by Senators Lieberman and Warner in October. This bill is well-intended, contains some good points, and appears to have bipartisan support.

But on closer examination, questions arise. Who really stands to gain, and who stands to lose? What are the real costs to average Americans?

You would expect the bridge to a low-carbon economy to have a cost, just as you might pay a toll to cross any bridge. But should some of us have to pay twice? With the Lieberman/Warner approach, that's exactly what would happen.

Lieberman/Warner proposes to auction a large number of emissions allowances to the highest bidder. In effect, an auction becomes a carbon tax, levied on consumers in the 25 states that depend on coal for electric power--primarily the Midwest, the Great Plains, and the Southeast.

Electric power customers in those regions would have to pay for the auctioned allowances upfront, and then pay again later to upgrade power plants, or build new ones, as carbon-control technologies become available.

A better approach is to allocate allowances at no cost to generators who emit greenhouse gases--and reduce the number of allowances over time, while new carbon-control technologies are being developed and put in place.

Some say that an auction is the only way to take action to reduce emissions, but history tells us otherwise. Allowances were not auctioned under the 1990 Clean Air Act Amendments; nearly 97 percent of them were allocated at no cost. Since then, new technologies to reduce sulfur dioxide and nitrogen oxide emissions have been developed and implemented. Those environmental controls have reduced emissions by more than 40 percent since 1990, and they continue to decrease, without dramatic rate hikes. In fact, the nation's average electric rates have declined.

In contrast, some estimates put the Lieberman/Warner bill's cost to the average family at more than $1,000 per year, while emissions traders would stand to profit greatly from a volatile market for carbon allowances. According to Bloomberg, the Lieberman/Warner bill would create a potential $300 billion annual carbon-trading market by 2020.

So the question comes down to this--are we interested in protecting consumers or enriching emissions traders?

Customers who live in the Midwest, the Great Plains, and the Southeast did not choose to get a large portion of their electricity from coal--it was a matter of economics, geography, and geology. They should not be punished for decisions made decades ago, in good faith, using the best and lowest-cost technology of the time, with regulatory approval--and long before anyone knew about the impact of carbon emissions on climate change.

And before we dismiss coal as a viable energy source for the future, consider this: The U.S. is sitting on more than 250 years of coal reserves, more than any other nation in the world. This rich natural resource has untapped potential for ensuring our country's energy security. The challenge is primarily technological--to find smarter and cleaner ways to use it, such as carbon capture and storage. Until those technologies are available, we must continue to use our existing coal resources and protect the interests of consumers who rely on coal.

The goal for carbon legislation should not be to punish utilities for building coal plants to keep the lights on in the past. It should be to create the incentives to put new clean technologies in place for the future--not just clean coal, but also nuclear and renewable energy, natural gas and the fifth fuel--energy efficiency.

Under the Lieberman/Warner approach, electric power customers in half of our states will carry a disproportionate share of the burden. We need to pass climate legislation that is fair to all consumers and protects the economic interests of all states and regions. Our climate is at stake, and so is our economy. By allocating most allowances, following the precedent set by the successful Clean Air Act, we believe both can be protected.

Jim Rogers is the CEO of Duke Energy, writing as a guest columnist on the Cleantech Blog.

IBM has partnered with two other companies to build an application that they say can accurately measure corporate efforts to reduce greenhouse gas emissions.

The software, called GreenCert, is built on IBM's infrastructure software and tools from C-Lock Technology, which can accurately measure reductions in greenhouse gases including carbon dioxide. The companies are expected to detail the application on Wednesday.

Many companies are undergoing initiatives to reduce their carbon emissions, as part of corporate social responsibility or environmental programs.

Having a method to measure and certify those reductions is significant because it will allow those companies to sell those carbon offsets, according to IBM. The application is part of IBM's Big Green Innovations initiative to develop clean technologies.

"The whole point of the application's output is to give you a high-quality offset that is transparent and reproducible," said Tim Kounadis, director of worldwide channel marketing for the company.

Not having an audit trail is a "big inhibitor" to participating in carbon markets where polluters buy and sell offsets, he said.

Mandatory and voluntary reductions in greenhouse gas emissions resulted in about $10 billion of carbon credits traded in 2005, mostly in Europe, and volume is expected to grow rapidly, according to the International Emissions Trading Association and the World Bank.

You would think a market projected to grow to $4 billion over the next five years would have a rock-solid way to measure its currency. Now, it has a least one standard.

The Voluntary Carbon Standard was released Monday, providing a much sought-after framework to account for voluntary carbon offsets.

Voluntary carbon offsets are a way for individuals or businesses to spend money to reduce their greenhouse gas emissions. Pollution reduction credits of various flavors are already being figured into the business plans of many green tech start-ups.

If a corporation wishes to be carbon neutral, for example, it will give money to an organization that will invest in projects that reduce pollution. For example, offset money can be used to fund a renewable energy project in developing country. The carbon dioxide emissions that are eliminated by that project can be sold and traded on carbon markets.

These offset programs are already widely used. However, some of the projects have come under scrutiny and received some skepticism.

In one case, BusinessWeek magazine investigated an offset project that did indeed reduce pollution. But it was unclear whether that project qualified as something new, or just part of what that company would have done regardless of any offset investment.

The Voluntary Carbon Standard was developed by the Climate Group, the International Emissions Trading Association (IETA), and the World Business Council for Sustainable Development (WBCSD).

The groups said that its verification process will result in greater transparency and rigor in certifying voluntary carbon offset projects.

In addition to voluntary markets for trading carbon reductions, there is a regulated market created in Europe after the establishment of the Kyoto Protocol.

In the United States, there are a few regional carbon emission reduction programs based on trading pollution allowances now being formed. Federal regulations are also being proposed

To read more about "carbon capitalism" in regulated markets, check out next month's cover story at Bloomberg Magazine. California governor and carbon market advocate Arnold Schwarzenegger graces the cover.