Estimating Investment Risk and Market Potential for Greenhouse Gas Abatement Steven Rose Global Climate Change Research Group September 27, 2011 Forestry

Estimating Investment Risk and Market Potential for Greenhouse Gas Abatement

Steven RoseGlobal Climate Change Research Group

September 27, 2011

Forestry and Agriculture Greenhouse Gas Modeling Forum Workshop #6: Forestry, Agriculture & Climate Change: Modeling to Support Policy Analyses, Shepherdstown, WV

2© 2011 Electric Power Research Institute, Inc. All rights reserved.

Objective

•Generate more market (and policy) realistic estimates of GHG abatement potential


Motivation

• Waxman-Markey (H.R. 2454) and Kerry-Lieberman (S.1733) rely heavily on large-scale domestic and international offsets for “cost containment” and uncertainty management – other countries as well

• To date, legislative analysis has been based on offset supply estimates of economic potential, some with ad hoc adjustments

• There is a lack of analytic information available about the “market potential” of domestic and international offset supplies, particularly in the critical near-term (2012-2020).


Capped Abatement and Costs Extremely Sensitive to Offset Supply (& Intl Assumptions)

$8

$13

$15

$13

$27

$18

$12

$10

$18

0

20

40

60

80

100

120

140

H.R. 2454 No Int'lOffsets

H.R. 2454(Updated)

No Int'lOffsets

No int’l ordomestic

offsets

Int’l offsetsdelayed 20

years

No REDDoffsets

EarlyDeveloping

CountryAction

NoDeveloping

CountryAction

Cu

mu

lati

ve a

bat

emen

t 20

12-2

050

(GtC

O2e

q)

$-

$5

$10

$15

$20

$25

$30

2000$/tCO

2 eq

Intl offsets additional purchasedIntl offsets creditedDomestic offsetsCapped2012 allowance price

Jun 2009 analysis

Jan 2010analysis

Source: Derived by S Rose from original and supplemental EPA Analysis H.R. 2454* See Rose and Sohngen (2011)

* Ignoring significant

forest leakage


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

Legislative modeling based on economic potential or ad-hoc adjustments


Generating Market Potential Estimates

1. Developing data to capture country risks, technology risks, implementation realities, and transaction cost

2. Estimating new GHG abatement supplies that reflect:

– Project risk, implementation realities, transaction cost

– Alternative policy & institutional contexts

– Interactions between technologies and regions due to changes in the relative values of activities


Scope and Collaborators

• Non-CO2 GHG abatement – Jeff Petrusa, Robert Beach (RTI International)

• International energy CO2 abatement– Kate Calvin, Leon Clarke, Jae Edmonds (PNNL)– And, EPRI modeling

• Forest and agricultural abatement– U.S. forest and agriculture modeling

(Bruce McCarl, Texas A&M University)– Global forest and land-use modeling

(Brent Sohngen, Ohio State University)– Global forest and agriculture economy-wide and trade modeling

(Alla Golub & Tom Hertel, Purdue University)

• Investment Risk Data– Natsource LLC


New Data for Economic Modeling – Investment Risk


Five Risk Factors Affect Delivery Rate

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

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

• Country Carbon Regulatory Risk (CCR) – Risk the host country is unable to bring forward an offset project as a CDM/JI project.

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

the CDM/JI regulatory process may affect a project’s ability to produce the contracted volume.

• Project Technology Performance Risk (PTP) – Risk that project implementation takes longer than planned, and/or the technology underperforms operationally.

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

transaction could be cancelled.


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CI CCR PCP PTP TR

China

Brazil

Dem Rep Congo

Delivery Rate Factorse.g., China, Brazil, DR Congo Afforestation/Reforestation

Country Technology

Whiskers 5th – 95th percentiles

Preliminary. Not for citation.


Delivery Rate Data

• Developed with Natsource LLC – Natsource managed two large compliance funds that purchased offsets (CERs, ERUs) for firms limiting emissions under EU ETS & Kyoto Protocol

• Default risk assessments informed by expertise with countries and project types, and updates reflecting regulatory & other developments– Evaluation of over 1000 projects: ~900 CDM projects (56 countries, 48

technologies), ~100 JI projects (12 countries, 24 technologies)

• Generated expected delivery rates and standard deviations for a project-based environment based on CDM/JI– 65 technologies and 200 countries (161 CDM, 39 JI)– Not all technology-project combinations covered by evaluated projects,

but defaults can be estimated from assessments

• Result is benchmark data – raw material for entertaining alternative abatement contexts (policies, institutions, experience, scientific understanding)

Preliminary. Do not quote or cite.


Implementation and Scenarios


Steps

• Computed overall delivery rates

– Conceptually appropriate?

– Risks captured in modeling?

• Economic model implementation

– Interpretation?

– Mechanics? Quantity, price, or cost adjustments

– Scenarios?

Preliminary. Do not quote or cite.

$-

$10

$20

$30

$40

$50

0 5 10 15 20 25

MtCO2 / year

$ /

tCO

2e

price adj

quantity adj


International purchase delivery rates sample

0.0

0.2

0.4

0.6

0.8

1.0

IGCC GeoSequestration

CMM Biomass forHeat or Power

Wind Afforestation

Exp

ect

ed

de

live

ry r

ate

China South Africa Russia Cote d'Ivoire

Higher delivery rates for domestic purchases



Scenario Dimensions

• Want a scenario set that is parsimonious with broad policy applicability (beyond offsets)

• Four dimensions shape mitigation supply– Generic investment risk– Greenhouse gas market investment risk – Greenhouse gas policy type– Greenhouse gas policy mechanism

• With a strategic set of plausible variations in these dimensions, we can generate a useful set of insights on the mitigation supply and market implications of investment risk and voluntary incentives


Sample of Latest Results

US Agriculture & Forestry


Offset Market Potential Supply

0

10

20

30

40

50

60

70

80

90

100

0 500 1000 1500

Annualized MtCO2e / year

An

nu

aliz

ed

pri

ce

($

/MtC

O2

e)

Economic potential

Market potential

31%

23%

18%



Market Potential Effects on Mitigation Technologies

• Resulting delivery rates not equal to Delivery Rate factor – interactions between technologies important

• Current approaches making ex-poste adjustments miss interactions


Reduction relative to factor: More Less Emissions increasing

Delivery rate factorResulting delivery rate

($15+5% scenario)Afforestation 58.8% 80.1%Forest Management 58.8% 83.5%Ag Soil N2O 58.8% 71.4%Ag Fuel 100.0% 74.0%Manure Emissions 99.8% 99.2%Enteric Emissions 58.8% 82.8%Grain Ethanol 58.8% -9.5%



International Agricultural Non-CO2


-20

0

20

40

60

80

100

120

0 100 200 300 400 500 600 700 800 900

2020 Reduction (MtCO2eq / year)

$/tC

O2e

q

Offset Market Potential Supplye.g., International Agriculture (Crops, Rice Paddies, Livestock)

2020 International Agricultural Mitigation Supply

EconomicMarket (CDM/JI)


Reduced supply due to delivery risks and

lack of intl ag protocols


-20

0

20

40

60

80

100

120

0 100 200 300 400 500 600 700

2020 Reduction (MtCO2eq / year)

$/tC

O2e

q





Non-Annex 1 has largest potential but greatest risk

Non-Annex 1Annex 1


-20

0

20

40

60

80

100

120

0 100 200 300 400 500 600 700 800 9002020 Reduction (MtCO2eq / year)

$/tC

O2e

q





Market (Tradable)

Increased supply with country assurance

(vs. CDM)


-20

0

20

40

60

80

100

120

0 100 200 300 400 500 600 700 800 9002020 Reduction (MtCO2eq / year)

$/tC

O2e

q





Market (Tradable)

Market (Improved, CDM/JI & Tradable)

Increased supply with improved institutions

and protocols



International Forestry


-100.0 0.0 100.0 200.0 300.0

Economic

Market(CDM/JI)

Canada

Russia

EU25

Other Europe

Other CEE

Brazil

C America

Rest S America

SSA

AF Middle East

Japan

Oceania

China

E Asia

SE Asia

S Asia

India

Offset Market Potential Supplye.g., International Forest Carbon

Cumulative Additional Forest Carbon (through 2090)

China SE AsiaEU 25Russia Brazil SSA

India



Offset Market Potential Supplye.g., International Forest Carbon

Cumulative Additional Forest Carbon (through 2090)


Delivery rate factor

Resulting delivery rate ($15+5%

scenario)China 0.29 0.77Brazil 0.24 -0.02Canada 0.17 1.86Russia 0.29 0.66EU25 0.17 0.89Other Europe 0.17 1.60Other CEE 0.15 0.58C America 0.15 1.24Rest S America 0.24 -0.01SSA 0.09 -0.04SE Asia 0.26 -0.01Oceania 0.09 0.38Japan 0.17 0.49AF Middle East 0.17 -1.92E Asia 0.17 0.06S Asia 0.15 0.27India 0.26 0.11

Reduction relative to factor:

More

Less


Final Thoughts

Preliminary insights…

• Investment risks– Vary by country-technology pair, policy and institutions

– Are a “cost” absent from previous modeling of GHG mitigation supply

– Can significantly affect the cardinal and ordinal value of abatement technologies

• NAMAs likely reduce international abatement supply further

• Voluntary participation – a one-sided incentive that could have perverse effects

• Transactions costs work slow going – limited information

• Preliminary results


Discussion

Steven Rose Tel: 202-293-6183Email: [email protected]

Documents

Estimating Investment Risk and Market Potential for Greenhouse Gas Abatement Steven Rose Global Climate Change Research Group September 27, 2011 Forestry