new estimates of global offset supply: accounting for ... · market-$30-$20-$10 $0 $10 $20 $30 $40...

Steven Rose

12th IEA-EPRI-IETA GHG Trading Workshop

October 16, 2012

Paris, France

New Estimates of Global Offset Supply:

Accounting for Market Realities

Preliminary results

3 © 2012 Electric Power Research Institute, Inc. All rights reserved.

Compliance Costs Extremely Sensitive to Offset

Supply – e.g., H.R. 2454 (Waxman-Markey)

$8

$13

$15

$13

$27

$18

$12

$10

$18

0

20

40

60

80

100

120

140

H.R. 2454 No Int'l

Offsets

H.R. 2454

(Updated)

No Int'l

Offsets

No int’l or

domestic

offsets

Int’l offsets

delayed 20

years

No REDD

offsets

Early

Developing

Country

Action

No

Developing

Country

Action

Cu

mu

lati

ve

ab

ate

me

nt

20

12

-20

50 (

GtC

O2e

q)

$-

$5

$10

$15

$20

$25

$30

20

00

$/tC

O2 e

q

Intl offsets additional purchased

Intl offsets credited

Domestic offsets

Capped

2012 allowance price

Jun 2009

analysis

Jan 2010

analysis

Source: Derived by S Rose from original and supplemental EPA Analysis H.R. 2454

* See Rose and Sohngen (2011)

* Ignoring significant

forest leakage

Study Objective: Generate more market and policy

realistic estimates of GHG offset abatement potential,

especially for the critical near-term.


Moving from Economic to Market

Abatement Potential

Emission reductions

$/tCO2

Economic

Potential Market

Potential

Policy/program

requirements, constraints,

& institutions

Market interpretation of

institutions, timing & rules,

and differences in

countries and technologies

Previous legislative

modeling (e.g., EPA)

based on economic

potential and ad-hoc

adjustments


Improving Offset Supply Estimates

1. Accounting for investment risks and different

investment contexts

2. Modeling “voluntary supply” incentives by offset

suppliers in carbon markets

Two products

1. Improved offset supply curves that better reflect market realities

2. A consistent and flexible global dataset of investment risks –

(200 countries x 65 technologies)


Mitigation Estimates for these

GHG Sources and Carbon Sinks

Domestic U.S. GHG

emissions and sequestration

• Agriculture & forestry

– Crops and livestock

(CH4, N2O, soil C)

– Forestry (primarily soil

and above ground C)

• Non-CO2 GHG sources

– Landfills (CH4)

– Coal mines (CH4)

– Oil and gas production

and transport (CH4)

– Nitric and adipic acid

production (N2O)

International GHG emissions

and sequestration

• Agriculture & forestry – Crops and livestock

(CH4, N2O, soil C)

– Paddy rice (CH4, N2O, and soil C)

– Forestry (primarily soil

and above ground C)

• Non-CO2 GHG sources

– Landfills (CH4)

– Coal mines (CH4)

– Oil and gas production and transport

(CH4)

– Nitric and adipic acid production (N2O)

• Electric and non-electric energy (CO2)


Investment Risk Data –

Delivery Rates (DR)


Five Risk Factors Affect Delivery Rates

Country • Country Investment Risk (CI) – Risk to the project’s continuing

operations created by the “host” country’s macro-economic, monetary and fiscal policies, and overall stability.

• Country Carbon Regulatory Risk (CCR) – Risk associated with the nature and maturity of the host country’s regulatory system for bringing forward an offset project for international transaction.

Project • Project Carbon Performance Risk (PCP) – Risk that changes in

the international regulatory process may affect a project’s ability to produce the contracted volume.

• Project Technology Performance Risk (PTP) – Risk that project will not be fully implemented and operational, or that it would encounter operational difficulties once implemented.

Generic • Transaction Risk (TR) – Inherent additional risk that a financial

transaction could be cancelled.


Delivery Rate Factors and Overall Delivery Risk

Example: China & S Africa Coal Mine Methane

0%

20%

40%

60%

80%

100%

China

S Africa

Country Technology

Preliminary. Not for citation.

100% = no risk

13,000 country/technology

representative risk characterizations


Sample of International Delivery Rates for

Different Project Types


0%

20%

40%

60%

80%

100%C

oal

min

e C

H4

Geo

. Seq

uest

rati

onA

ffor

esta

tion

Bio

mas

s fo

r H

/PEV

/PH

EV

Ad

ipic

/nit

ric

acid

N2

O

Co

al m

ine

CH

4G

eo. S

eque

stra

tion

Aff

ores

tati

onB

iom

ass

fo

r H

/PE

V/P

HE

VA

dip

ic/n

itri

c ac

id N

2O

Co

al m

ine

CH

4G

eo. S

eque

stra

tion

Aff

ores

tati

onB

iom

ass

for

H/P

EV/P

HE

VA

dip

ic/n

itri

c a

cid

N2

O

Co

al m

ine

CH

4G

eo. S

eque

stra

tion

Aff

ores

tati

onB

iom

ass

fo

r H

/PEV

/PH

EV

Ad

ipic

/nit

ric

acid

N2

O

Co

al m

ine

CH

4G

eo. S

eque

stra

tion

Aff

ores

tati

onB

iom

ass

for

H/P

EV

/PH

EV

Ad

ipic

/nit

ric

aci

d N

2O

China Brazil Korea Mexico South Africa

The data is raw material on relative

risks for examining alternative

mitigation investment contexts


Delivery Rate Adjusted “Market

Potential” Results – Sample


Regional Forest Mitigation Supply 2020

0

10

20

30

40

50

60

0 5 10 15 20 25 30

$ /

tC

O2

eq

GtCO2 / year

2020

Economic

potential Market

potential

Group 1

(Developed

regions)

Group 2

(Developing/

transitional

regions)



-20

0

20

40

60

80

100

120

0 100 200 300 400 500 600 700

2020 Reduction (MtCO2eq / year)

$/t

CO

2e

q

International Agriculture (Crops, Rice Paddies,

Livestock) GHG Mitigation Supply in 2020

Economic

potential

Market potential

Group 2 Group 1



International Energy, Industry, Waste

Non-CO2 GHG Mitigation Supply in 2020


-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

0 100 200 300 400 500 600

$ /

tCO

2eq

MtCO2eq / year

Group 2

Economic

Group 2

Market

Group 1

Economic

Group 1

Market

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

0 50 100 150 200

$ /

tC

O2

eq

MtCO2eq / year

Group 2

Economic

Group 2

Market

Group 1

Economic

Group 1

Market

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

0 50 100 150

$ /

tC

O2

eq

MtCO2eq / year

Group 2

Economic

Group 2

Market

Group 1

Economic

Group 1

Market

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

0 20 40 60 80

$ /

tC

O2

eq

MtCO2eq / year

Group 2

EconomicGroup 2

Market

Group 1

Economic

Group 1

Market

Oil & Gas Production Coal Mines

Landfills Nitric/Adipic Acid Production



Regional Reordering in Mitigation Supply E.g., International Forests

Cumulative Carbon Gains* Above Baseline by 2020 ($15/tCO2)

• Delivery

likelihood

changes supply

importance of

regions (e.g., SE

Asia, SSA)

• Relative

likelihood

magnifies these

effects shows

importance of

modeling

Economic

potential

(GtCO2)

Market

potential

(GtCO2)

% of

economic

potential

Prescribed

delivery rate

India 11.6 10.6 91% 50%

SE Asia 8.7 0.5 6% 37%

Sub-Saharan Africa 7.3 1.4 19% 22%

Rest of S America 6.3 3.4 55% 38%

Brazil 5.7 4.2 73% 46%

China 4.5 4.2 94% 50%

Russia 3.1 2.0 63% 51%

Oceania 2.6 0.8 31% 29%

C America 2.6 2.5 97% 38%

E Asia 2.2 0.2 10% 35%

S Asia 0.6 0.1 16% 28%

N Africa/Middle E 0.6 0.5 82% 25%

Group 2 Total 55.7 30.4 55% n/a

* Notes: Includes additional aboveground and below ground carbon sequestration



-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

0 100 200 300 400 500 600 700

$/t

CO

2e

MtCO2eq / year

Improved Risk Conditions in the Future? E.g., Intl. Oil & Gas Production Mitigation Supply 2020

Market

(tradable*)

Economic

Market

(evolving)

Market

(current)

*Assumes “host” country bears

liability for delivery

Increased supply with improved

institutions and protocols?

What’s possible?

Increased credit supply with

country assurance?



Mitigation Potential Adjusted for

“Sectoral” Offset Policy Environment

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

0 50 100 150 200 250

$/t

CO

2e

MtCO2eq / year

Economic

MarketSectoral-

adjusted

International coal mines

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

0 100 200 300 400 500 600 700

$/t

CO

2e

MtCO2eq / year

Economic

MarketSectoral-

adjusted

International oil & gas production

Reduced supply due to

delivery risks & sectoral

compliance


Country Sectoral policy

Brazil 35% below business as

usual (BAU) by 2020

China

45% emission intensity

reduction below 2005 levels

by 2020

Russia 25% below 1990 levels

India

25% emission intensity

reduction below 2005 levels

by 2020

Mexico 30% reduction below BAU

by 2020

South

Africa 34% below BAU by 2020


Modeling “Voluntary Supply” Incentives

by Offset Suppliers in Carbon Markets


Voluntary Supply by Offset Suppliers

• Past offset supply modeling was based on comprehensive pricing of all emissions (and sequestration), but this approach is inconsistent with how offset markets operate in practice.

– In capped sectors, all GHG emissions are priced and participants have no choice whether to participate. Mitigation avoids the marginal cost of emissions (i.e., allowance price)

– In offset sectors, offset suppliers volunteer mitigation in exchange for payment. Emissions are not priced in these sectors, and there is no emissions cost for non-participants.

Voluntary supply incentives should be modeled in estimating offset supplies. This has not been done

in previous analyses.


$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

-2 -1 0 1 2 3 4 5 6 7 8

$ /

tC

O2

GtCO2 / year

International Energy Voluntary Supply 2020 (Subsidy for Low-Carbon Energy)


Economic

potential

Crediting for above baseline deployment and better than

average energy mix emissions. Including delivery risk.


$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

-2 -1 0 1 2 3 4 5 6 7 8

$ /

tC

O2

GtCO2 / year



Economic

potential

Optional

participation

credits




$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

-2 -1 0 1 2 3 4 5 6 7 8

$ /

tC

O2

GtCO2 / year



Economic

potential

Optional

participation

credits

Net abatement

w/ optional

participation

Credits issued exceed abatement

(and net emissions increasing)

Overpayment occurs in

developing & developed regions



Overpayment >

$50 billion

at $20/tCO2


0

50

100

150

200

250

300

350

400

Economic potential Optional - Perfect crediting

Optional - No additionality req.

MtC

O2

eq

/ y

ear

(a

nn

ua

lize

d)

Mitigation

Opt-in activity

Opt-in activity paid

Opt-in not paid

US Ag/Forest Voluntary Supply (Opt-in Program with Crediting Bookends)

1. “Perfect crediting.” Crediting only for net mitigation (= participant + non-participant

emissions – baseline emissions). Captures additionality and leakage.

With $30/tCO2eq



US Ag/Forest Voluntary Supply (Opt-in Program with Crediting Bookends)

1. “Perfect crediting.” Crediting only for net mitigation (= participant + non-participant

emissions – baseline emissions). Captures additionality and leakage.

2. Crediting for existing carbon and new mitigation w/o additionality requirement

With $30/tCO2eq

• Bookends reveal that

mitigation will be less

than when emissions

are “priced.”

• Mitigation could be

positive.

• Real world crediting lies

in between bookends.

“Perfect crediting”

information

requirements very

demanding (realistic?).


0

50

100

150

200

250

300

350

400

Economic potential Optional - Perfect crediting

Optional - No additionality req.

MtC

O2

eq

/ y

ear

(a

nn

ua

lize

d)

Mitigation

Opt-in activity

Opt-in activity paid

Opt-in not paid


Preliminary Insights


Preliminary Insights

• The market potential for offsets is significantly less than the economic potential previously estimated by US EPA and others.

• Investment risks were not included in previous analyses.

– Investment risks affect the cardinal and ordinal value of GHG abatement technologies & regions, with strong interactions.

– It may be difficult to reduce some investment risks.

• Sectoral approaches are likely to further reduce international offset supplies, rather than increase them.

• The option of offset suppliers to participate should be modeled in estimating offset supplies. This has not been done in previous analyses.

– Our analysis to date suggests that this is an important topic, with possible policy design ramifications – the potential for actual abatement to be less than the credits supplied.

• Study relevant to many policy contexts – offsets writ large (e.g., Australia, California), sectoral, UNFCCC, linked markets, generic risks.



Project Team

• Principal investigator: Steven Rose

• Collaborators

– EPRI: Adam Diamant, Francisco de la Chesnaye

– Non-CO2: Jeff Petrusa, Robert Beach (RTI International)

– International energy: Kate Calvin, Jae Edmonds,

Marshall Wise (PNNL)

– U.S. forest/agriculture: Bruce McCarl (Texas A&M Univ.)

– Global forest: Brent Sohngen (Ohio State University)

– Investment Risk: Rob Youngman, Rich Rosenzweig

(Natsource LLC)


Thank You

Steven Rose

Senior Research Economist

Energy & Environmental Analysis Research Group

202-293-6183

[email protected]

Together…Shaping the Future of Electricity

mailto:[email protected]

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new estimates of global offset supply: accounting for ... · market-$30-$20-$10 $0 $10 $20 $30 $40...

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