Charles Morgan, Partner - TechnologyITechLaw 2010, Boston, MAMay 20, 2010

The Regulation of Carbon: Implications for the Technology Sector

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Presentation overview

• Regulating carbon emissions in North America: existing regulations and carbon markets

• Offsets: how do they work; who is supplying them; who is acquiring them?

• Implications for the technology sector: reducing one’s carbon footprint

• Exploiting investment opportunities for green IT and the technology sector

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Context

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Climate ChangeExcessive carbon emissions have created one of humanity’s greatest challenge yet: climate change.

The urgency of the situation is well described by the United Nations Environment Program:

• “For now, the evidence suggests we may be within a few years of crossing those tipping points which could disrupt seasonal weather patterns supporting the agricultural activities of half the human population, diminish carbon sinks in the oceans and on land, and destabilize major ice sheets that could introduce unanticipated rates of sea level rise within the 21st century.

The basic scientific building blocks behind forecasts of widespread and damaging climate change, especially those from the Intergovernmental Panel on Climate Change (IPCC), are irrefutable. Unless action is taken soon to stabilize and then decrease concentrations of greenhouse gases in the atmosphere, these changes will cause widespread damage to ecosystems, natural resources, and economic activities. Such damages could end prosperity in developed countries and threaten human survival in developing countries.”

UNEP Year Book 2009, p. 29

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American Power Act• Introduced in Senate last week by senators Kerry and Lieberman• Bill would provide $6 billion worth of tax credits for energy

efficiency projects and green transportation, plus $5 billion toextend clean energy manufacturing tax credits.

• Aims to reduce carbon emissions in the U.S. by 17 percent by theyear 2020 compared to 2005 levels, 42 percent by 2030 and 83 percent by 2050.

• It would set a price of $12 per ton for allowances to emit carbon dioxide. That rate would rise 3 percent each year with inflationuntil hitting a cap of $25 per ton.

• The bill would create a system of carbon offsets and credits that would allow a price to be set for carbon emissions.

Q: How might this work and what are the likely impacts for the technology sector?

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Existing regulations and Carbon Markets: How do

they work?

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Cap-and-Trade v. Carbon Tax

Cap-and-Trade

Market is the most efficient way to reduce total emissions.

Governments fix the overallemission level by fixing a setnumber of pollution credits.

Carbon Tax

The more you pollute, the more taxes you pay.

Increases competitiveness of low carbon technologies.

Dissuades emissions by taxing.

Two Categories of Models Seeking Reduction of Carbon Emissions

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How to “Cap”? Flat v. Intensity

• Flat Amount:• e.g. 150,000 metric tonnes of C02

• British Columbia: capped its global emissions in 2020 at the flat rate of 33% of emission levels in 2007.

• Intensity Cap:• Relative to Gross Domestic Product (“GDP”) or Productions• Alberta: reduction target by December 31, 2020 of specified

gas emissions relative to GDP of an amount that is equal to or less than 50% of 1990 levels.

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Current Regulated Canadian Carbon Markets

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British Columbia• Laws:

• Greenhouse Gas Reduction Target Act, (SBC 2007) chap. 42.• Committed to reducing emissions:

• 2020: at least 33% of emission levels in 2007;• 2050: 80 % of 2007 emissions.

• Carbon-neutral public service by 2010.• Greenhouse Gas Reduction (Cap and Trade) Act, B.C .2008 c. 32

• Legislation for Carbon trading• Will enable B.C. to participate in the Western Climate Initiative (“WCI”).

• Measures:• Revenue neutral Carbon tax on fossil fuels

• Encourages people and businesses to reduce their use of fossil fuels• gradually phased in since 2008• All carbon tax revenues are returned to BC-residents through other tax

reductions • Cap-and-Trade System

• Targeted industries have yet to be “capped”, but reporting requirements apply

• Activities monitored: e.g. pulp and paper production; electricity transmission

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Alberta

• Laws & Regulations:• Climate Change and Emissions Management Act,

A. 2003, c. C-16.7• Reduction Targets for December 31, 2020:

• Specified gas emissions relative to GDP of an amount that is equal to or less than 50% of 1990 levels.

• Specified Gas Reporting Regulation, AR 251/2004 • Lays out reporting requirements for large emitters in Alberta

• Specified Gas Emitters Regulation, AR. 139/2007• Targets for regulated entities and guidelines for achieving

compliance• Forces facilities that emitted more than 100,000 tonnes of C02e in

2003, 2004, 2005 or 2006 to reduce their emissions intensity by 12% annually.

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Current Canadian Carbon Markets

• Measures:• Alberta-based offset credits:

• Created by facilities and sectors not subject to the regulations that are able to reduce their GHG emissions according to a government approved protocol and that meet the requirements of section 7 of the Specified Gas Emitters Regulation.

• Eligible reductions generate Offset Credits.• One (1) tonne of C02e reduction is equal to one (1) Offset

Credit. • These credits, once registered and serialized on the

Alberta Emissions Offset Registry, become a tradable unit. • Can be bought and sold by entities who must reduce their

emissions.

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Current Canadian Carbon Markets

• Ontario• Cap-and-Trade System (NOx & SO2)

• Emissions trading regulation, O. reg. 397/01 • If the emitter’s actual emissions are higher than

their allowances:• Then they must buy extra allowances from other

emitters or they may buy emission reduction credits

• Industrial sectors: electricity, iron and steel, cement, petroleum refining, pulp and paper, glass and carbon black

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Other carbon reduction initiatives

•Western Climate Initiative

Collaboration of independent jurisdictions who commit to work together to identify, evaluate and implement policies to tackle climate change at a regional level.

Joint strategy to reduce GHG emissions:• regional cap-and-trade system.

Each partner will begin reporting emissions in 2011Phase 1: January 2012Phase 2: 2015

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Non-regulated Carbon Markets

• GHG Clean Start Registry:

• Web-based registry established by the Canadian Standards Association (CSA).

• Allows Canadian businesses to showcase their emission reductions or removals.

• Businesses must follow ISO 14064 for greenhouse gas inventories and reporting.

• Tags each tonne of verified emission reduction/removals with a unique serial number

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Voluntary Markets

• Chicago Climate Exchange (“CCX”)• owned by the Climate Exchange Plc group of companies.• Emitting members make voluntary but contractually binding

commitment to meet annual GHG emission reduction targets.• Three different levels of membership (full, associate &

participant)

• 69.2 million tons of CO2e traded at a value of US$ 306.7 million.

• Six different types of GHG emissions converted into one common unit: the Carbon Financial Instrument (“CFI”).

• One (1) CFI = 100 tC02e.• CFIs may either be allowance-based credits or offset-based

credits.

• In 2008: One (1) tC02 = US$ 4.43 (average price)

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Voluntary Markets

• Montréal Climate Exchange (“MCeX”):

• Joint venture between the Chicago Exchange and the Montréal Exchange.

• Follows the rules set by the Montréal Exchange.• Trades in futures contracts and options on futures contracts.

• One (1) Futures Contract = 10 Canada CO2e.• One (1) Canada C02e = Entitlement to emit one (1) metric tonne of

C02e.

• No apparent transactions on the exchange on or around March 26, 2010

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Voluntary Markets

• Retail Market• Worldwide.• Projects:

• wind and hydro energy;• landfills;• geological sequestration;• etc.

• Reliable: 96 % of voluntary credits were verified by third parties in 2008.

• Prices for credits sold in retail in 2008:• Varies between US$ 1, 20 to 46.90 per tone of C02e.

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How does offset trading work?

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Offset Trading• Targeting all GHG gases: carbon, methane, ozone, etc.• All gases accounted under the common denomination: “carbon

equivalent”: CO2e

• Offset trading results from “Cap-and-Trade” system

• Centralized Agencies (e.g., Government/Crown Corporation):• determine which industries will have their emissions capped;• fix overall emission levels;• allocate allowances to emitters.

• Targeted Industries (Emitters):• Companies in the industry must measure and report their emissions;• If CO2 emissions exceed allowances: company must buy credits/pay a

fine• Companies below the cap: sell allowance/keep them for future use

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Offset Trading• Carbon Credits: the right to emit a set amount of C02• Carbon Trading: the trade of permits to pollute.

• Targeted & Non-Targeted Entities can sell credits for projects which reduce existing C02 levels.

• Examples:• Carbon capture and storage• Energy economy programs

• Credits can be sold to companies who need more credits in order to respect their cap

• Emitted C02 is compensated by an equivalent amount of credits• Once used, credits are retired and cannot be used again

• Correct accounting of retirement is critical: hence credits are numbered and registered

• Legitimacy• Third Party Registries & Standardization• Independent Accounting

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For example: Pacific Carbon Trust

Pacific Carbon Trust (“PCT”):• Acquires offsets on behalf of the

B.C.’s public sector to achieve its commitment under the Greenhouse Gas Reduction (Cap and Trade) Act.

• Local governments, businesses and individuals who voluntarily wish to offset their emissions may purchase offsets from PCT

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What are offsets?

• Offsets are qualifying reductions in greenhouse gas emissions generated by activities, such as projects to increase energy efficiency, that are used to balance the emissions from another source.

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Who are suppliers of offsets?• Suppliers of offsets are project proponents who’s projects have

been accepted by PCT. • The following are conditions projects must meet in order to be

eligible for PCT to buy their offsets:• The project proponent must have, or be able to establish, a clear

title to the carbon attributes of the project.• The project must result in quantified an independently verified

emission reduction which results from a specific action or decision.• The GHG reduction achieved through a project activity must be

incremental to that which would have occurred in the absence of the project activity.

• The project must not be already required by law.• The project plans must be validated by PCT and regular reports

must be verified by a third party assurance provider under ISO 14064-3 standards.

• Answer: Your company???

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How are offsets sold to PCT?• If all the conditions are met at the pre-qualification stage, the project

proponent becomes a Qualified Supplier. • PCT then issues a final selection solicitation to all the Qualified Suppliers. • These suppliers will then submit a complete project plan that has been

verified by an independent third party under ISO 14064-3 standards. • The winners of this bid will begin discussions in order to sign an offset

purchase agreement. • The proponent must then generate a project report based on the actual

performance of the project which will again be verified by an independent third party under ISO 14064-3 standards.

• Once the report has been reviewed by PCT, the emission reduction or removal enhancement becomes an Offset which is then purchased by PCT who then places it in its inventory.

• To ensure careful tracking and to avoid double counting, PCT gives each offset an identification number.

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Example of an offset project?

• PCT has contracted to purchase offsets generated from LaFarge Canada inc’s cement plant in Richmond, B.C.

• The cement producer is reducing the amount of coal burned by replacing a portion of this coal with biomass and other materials from construction waste.

• Changing to theses different fuels involved considerable investment into technology and process alterations for a plant which was originally designed to burn coal.

• Selling the offsets to PCT allowed these changes to be financially viable.

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Implications for the technology sector

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Implications for the technology sector

• Carbon costs money • Efficient use of IT helps to reduce carbon costs

• Carbon reduction technologies are increasingly valuable• Patenting and licensing opportunities

• A carbon reduction project may result in a supply of monetizable offsets• Green IT projects with offset potential represent

important investment opportunities• Green IT projects have a charismatic “narrative”

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Offsetters’ Carbon Strategy

• Know: audit and report carbon footprint• Reduce: reduce emissions through

efficient use of IT• Offset: Supply or acquire• Enable and Inspire: Tell a story; exploit

the marketing potential

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Carbon costs money: Audit

• Explosion of data use:• eBay inc. began with 14 terabytes in 2002 and now

processes 50 petabytes (50 times 1,000 terabytes) of information each day while adding 40 terabytes of auction and purchase data.

• Wal-Mart handles more than one million customer transactions every hour and stocks 2.5 petabytes(this is 167 times the books in America’s Library of Congress).

• In 2008 the ICT sector as a whole (this includes PCs, telecom networks and devices, printers and data centers) was evaluated to be responsible for 2% (830 MtC02e) of global carbon emissions

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Green IT solutions: Reduce

• Consolidation • Cloud Computing Outsourcing Solutions;• Relocation of company-operated facilities to massive computing

warehouses;

• Pooling of Resources• Virtualization (potential reduction of emissions by 27%/ 111 Mt

CO2e).• Utility Computing

• Improvements to Data Centers• Cooling systems are responsible for 45% of energy consumption.• Distribution of Low Voltage Direct Current into Data Centers.

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Protecting and exploiting Green IT

• Developing a green IT patenting strategy• Is there licensing potential?

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Monetizing offset potential: supply• Carbon reduction projects typically have a high technology

component

• Might a project have offset potential?

• A high quality offset:

1. Real, quantifiable emissions reductions;

2. Additional (to what would happen anyway);

3. Permanent emissions reductions; and

4. Generates strong social and environmental benefits.

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Tell a story

• Green IT enhances your brand

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