carbon credits - texas city attorneys...austin, texas 78701 austin, tx 78701 (512) 322-5806 (512)...

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Texas City Attorneys AssociationSouth Padre Island – June 10, 2009

Climate Change and its Impactson Municipal Operations

Presented by:

Paul G. GosselinkLloyd Gosselink Rochelle & Townsend, P.C.(512) 322-5806

Jason TournillonGT Environmental Finance, LLC (512) 342-2711

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Carbon Credits

Why should a city consider generating and selling them?

RevenueGlobal Environmental BenefitsPositive Public Relations

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Too Good to be True?

Maybe.But chances are good.How good depends on cap and trade.

Will legislation pass?This session?Or be delayed?

Will EPA pass regulation?

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Is Global Warming Real?

Two sides to argument

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Is Global Warming Real – Does it Matter?

Which scientific view is right – immaterial2 reasons:

Cap and Trade seems inevitableEnough people in U.S. believe already that voluntary markets have formed

Regulated markets exist worldwide

Consider the opportunities

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Kyoto Protocol

U.S. signed original treaty in 1992166 nationsUnited Nations Framework Convention on Climate Change (UNFCCC)

Kyoto – 1997U.S. and KazakhstanObama Administration set to sign

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Cap and Trade Legislation

Touted for positive benefitsControl global warmingCreates jobsReduce the budget deficit

Will also create hardshipsCreates opportunities

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Opportunity to Sell Environmental Attributes

CommoditiesSold throughout worldGlobal issue – global marketU.S. Regional marketsVolume and Value escalating

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Environmental Attributes in Texas

Carbon CreditsRenewable Energy CreditsCompliance PremiumsIn addition

Production Tax CreditsInvestment Tax Credits

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DOE GrantsAbilene $1,131,600Allen $693,000Amarillo $1,781,600Arlington $3,428,100 Austin $7,492,700Baytown $672,300Beaumont $1,104,200 Bedford $201,200Brownsville $1,659,200 Bryan $695,100Carrollton $1,189,100 Cedar Hill $176,600 Cedar Park $519,700 College Station $791,100Conroe $538,300Coppell $171,200

Corpus Christi $2,757,500Dallas $12,787,300Del Rio $156,300Denton $1,117,000DeSoto $187,700Duncanville $148,600Edinburg $683,100El Paso $5,802,700Euless $454,200Flower Mound $607,700Fort Worth $6,738,300Frisco $825,800Galveston $580,100Garland $1,978,800Georgetown $201,900Grand Prairie $1,474,400

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DOE GrantsMcAllen $1,292,500McKinney $1,071,500Mesquite $1,200,900Midland $997,700Mission $629,500Missouri City $634,900New Braunfels $498,200North Richland Hills $584,900Odessa $915,100Pasadena $1,358,600Pearland $685,900Pharr $608,900Plano $2,545,400Port Arthur $541,300Richardson $1,036,200Round Rock $955,400

Grapevine $503,500Haltom $165,700Harlingen $645,100Houston $22,765,100Huntsville $166,500Hurst $165,500Irving $2,058,600Keller $155,000Killeen $1,027,000Lancaster $143,300Laredo $2,083,600League City $598,200 Lewisville $913,000 Longview $781,900Lubbock $2,109,900Mansfield $179,700

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DOE Grants

Rowlett $481,900San Angelo $865,000San Antonio $12,897,000San Marcos $498,100Sherman $170,000Sugar Land $781,400Temple $593,200Texarkana $174,300Texas City $191,600The Colony $156,200Tyler $1,005,700Victoria $605,700Waco $1,246,300Wichita Falls $996,100

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DOE Grants

Goal to award ALL the grant moneyIf rejected, reapply

Listing of virtually preapproved projects“Reduction and Capture of Methane and Greenhouse generated by landfills or similar waste related sources.”Deadline 6/25

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DOE Grants

If not on list – not to worryState funds$560 million60% must be passed throughEmail alerts – website

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What are Carbon Credits, RECs and Compliance Premiums?

See paper for definitions of RECs and Compliance Premium

REC 16 TAC §25.5(108) and 16 TAC §25.173(c)(13)Compliance Premium 16 TAC §25.173(c)(2)

Carbon credit – created when an emitterReduces his CO2e emissionsVoluntarilyAdditionality

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What are Carbon Credits?

Not just CO2Carbon Equivalent Unit CO2e6 Principal GHG’s in CO2e

CO2 carbon dioxideMH4 methaneN2O nitrous oxideHFC hydroflourocarbonsPFC perflourocarbonsSF6 sulfur hexaflouride

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Value of Carbon Credits

Jason will discuss dollar valuesMH4 – 21 xN20 – 300 X

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3 Questions

Who buys these credits?Why?What do they cost?

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BuyersGreen MarketingSincere attempts to slow global warmingPre-compliance buyingInvestment

SellersCities are typically sellers of CO2e

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Political and Legal Background

Massachusetts v. EPASupreme Court case that held that GHG are pollutants and may be regulated under FCAA by EPA.Court remanded case to EPA to reconsider the petition for rulemaking.

FCAA requires EPA to prescribe regulations for GHG if it determines that GHG “may reasonably be anticipated to endanger public health or welfare.”

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Endangerment Finding

Bush EPA not proceedObama EPA made endangerment finding on 4/17/09Bargaining chip with Congress

Cap and Trade Legislation PreferredEPA now positioned to pass rule

Probable lawsuit

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GHG Reporting Rule

Proposed RuleComments due 6/9, yesterday

85-90% of all GHG emitters1300 sourcesInformation gathering – not regulatoryGoal makes sense

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GHG Reporting Rule

Reporting ThresholdsAny facility that emits > 25,000 metric tonnes of GHGsAll manufacturers of motor vehiclesAll suppliers of fossil fuels (refineries, coal plants)Certain other sources – the “all in” sources (for city purposes a relevant source is landfills)

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GHG Reporting Rule

Rigorous requirementsFailure to report – up to $32,500/dayFraudulent report – criminal penaltiesFirst Report due 1/1/11

2010 dataHave to start in 6 months

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Cap and Trade Legislation

American Clean Energy and Security Act of 2009

Waxman-Markey900 plus pagesPassed House Energy and Commerce Committee in May 2009

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Cap and Trade - “CAP”

Carbon emitters will have limit (cap on the amount of GHG’s they are allowed to emit)

By legislation, orBy EPA rule

Stay at or below or face fines/injunctionsThis gives allowances to emit financial value

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Cap and Trade – “Trade”

Emitter that is capped has optionMake physical or operational changes, orTrade (buy) CO2e credits

Because less expensive

Each year allowances are reducedSupply and demandCO2e becomes more valuable

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Cap and Trade – Limits85% of total U.S. GHG emissions

Not landfillsNot wastewater plants

2010 – 3% below 2005 levels2020 – 17% below 2005 levels2050 – 83 % below 2005 levelsOffsets expressly allowed

Must reduce 1.25 tonnes of trailed emission for 1.00 tonnes of capped emissions

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Cap and Trade – Incentives

Emitter – buying offsets cost less than self reductionSeller – revenue producerEnvironment – fewer GHG emissionsEconomy – more cost effective

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Cap and Trade – ObjectionsPhilosophical/Economic

Cost of power increasesTo suppliersTo consumers

Cap and TaxDetails

Allowance v. AuctionCoal states unemploymentHydroelectric states precludedNot likely to pass as now draftedMay not pass at all

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Carbon OffsetsCarbon Offsets (“Carbon Credits”) represent the reduction of one metric tonne (MT) of greenhouse gas emissions (GHGs) from the atmosphereCome from projects that either destroy GHGs or prevent their emission in the first placeProjects must be Voluntary and Additional

Voluntary – not mandated by any law or regulationAdditional – beyond business as usual

Credits measured in MTs of Carbon Dioxide Equivalent (CO2e) because CO2 is the most prevalent greenhouse gasCan be traded as a commodity

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Types of Projects that Can Create Offsets (Differ by registry)

Landfill Gas CaptureLivestock Methane CaptureAforestation/DeforestationRenewable Energy (wind-solar-biomass)Coal Mine Methane CaptureFuel switching

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Carbon Market Set-up

InternationalMandatory Programs (EU ETS, Kyoto Protocol)

U.S.Regional Mandatory Programs (RGGI, WCI)Voluntary MarketPending for mandatory federal cap and trade program

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Who Uses Offsets?

Power producers and companies in states that are part of regional mandatory programsCompanies looking to reduce the environmental impact of their operations or prepare for future mandatory programsCompanies voluntarily undertaking “green” marketing initiatives

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How Offsets are Created?Identify and implement an eligible projectMonitor project data (QA/QC) over the course of the crediting period (typically a year)Calculate emission reductionsHave project operations and emission reductions calculations verified by an independent third-partySubmit verification results to registry – registry then issues credits

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How are they sold?

OTC versus Exchange market transactionsSelling forwardSelling vintage creditsBanking of credits

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St. Landry Parish Project example

Project IdentificationProject yields estimatedTerm Sheet negotiatedCommission approvalFull Contract signedProject implementation

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What did it cost?

Phase 1 = 16 wellsCollection systemFlareCurrent activities

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What would I be getting into?

Data CollectionLong term relationshipCommodity Market participation

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Why should you consider this?

Possible Regulatory RiskPossible compliance hedgePossible revenue sourceBetter positioned for future project negotiations

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Paul G. Gosselink Jason TournillonLloyd Gosselink Rochelle & Townsend, P.C. GT Environmental Finance, LLC816 Congress Avenue, Suite 1900 816 Congress Avenue, Suite 1220Austin, Texas 78701 Austin, TX 78701(512) 322-5806 (512) 342-2711pgosselink@lglawfirm.com jason@gtenvfin.com

THE ENDClimate Change and its Impacts on Municipal Operations

TCAA – South Padre Island – June 10, 2009