May 2011

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• Hey, Buddy, Wanna Buy A Slightly Used Energy Sector?
• Carbon Market Tracker
• US Policy Tracker: I Fought the Law

Hey, Buddy, Wanna Buy A Slightly Used Energy Sector?

The UK desperately needs investment to keep its energy sector afloat.  So why is government policy blocking that investment?

Among the lingering consequences of the global recession is the fact that the UK now has a serious problem attracting foreign investment.  Foreign direct investment in the country fell to £46 billion in 2007 – less than a quarter of the £186 billion the UK brought in only two years earlier.  While the current financial climate means investment has been slashed around the world, the UK government has reason to be concerned.  Once second only to the US in the amount of investment it attracted, the UK has now slipped into fourth place, behind China and France.  This is a worrying trend for a country that needs £110 billion worth of investment in its energy sector alone over the next ten years, if it is not to face serious energy shortfalls.

The UK’s regulatory climate doesn’t help matters.  Currently, the renewable energy industry is anxiously awaiting the government’s consultation on its plan to cut feed-in tariffs for large-scale solar energy projects in half.  The consultation, which ended on 6 May, has been controversial in itself; the government’s abrupt decision to revise the feed-in tariff rates, which it initially claimed were securely fixed for several years, has already damaged investment in the solar sector, even ahead of the final result.  After the consultation was launched in February, Low Carbon Investors, Triodos Bank, and others withdrew their plans to invest in solar projects.  Eleven solar power companies have now petitioned the high court, asking for the cuts to be blocked on the grounds that the consultation itself was illegitimate.  The companies claim that the Department of Energy and Climate Change (DECC) violated its own rules by reviewing the feed-in tariff rates early. 

Meanwhile, the government has recently launched another consultation, this one looking at whether to require all UK businesses to measure and report their carbon emissions.  (The Climate Change Act states that the government must implement this requirement, or provide concrete reasons for scrapping it, by April of 2012.)  There has been widespread industry support for making carbon reporting mandatory:  accurate information about their carbon emissions helps companies identify business opportunities and liabilities over the long term, and as smaller companies are sometimes reluctant to invest time and money in measuring their emissions, mandatory reporting would mean that they could do so with confidence, knowing that their competitors were facing the same costs.  However, despite this show of support, the government is hesitant, and is already making it known that it may require only the very largest companies to report their emissions.  

For more information about the state of climate policy in the UK, and how it fits into international climate politics, read the latest blog post from The CarbonNeutral Company’s Managing Director, Jonathan Shopley:  “Setting Free the Bears – An Update on Carbon Markets”.  

Carbon Market Tracker:  

The UK rethinks its failing Quality Assurance Scheme, while an innovation in insurance helps the carbon market trade with confidence.

The UK’s Department of Energy and Climate Change (DECC) has decided to review its Quality Assurance Scheme (QAS) for carbon offsetting, after the scheme’s annual review for the last year showed that fewer than 2% of transactions in the UK’s voluntary carbon market actually used the QAS.  This is widely held to be due to the limited scope of the QAS, which only covers Certified Emissions Reductions (CERs) from projects registered under the UN’s Clean Development Mechanism, and does not include Voluntary Emissions Reductions (VERs), the frequent choice for companies choosing to offset their emissions voluntarily.  This limitation, and the QAS’s subsequent lack of influence within the voluntary carbon market, have made the scheme largely irrelevant to most companies’ carbon management programmes.  The review may result in a broader QAS, incorporating VERs.  On the other hand, it may determine that offset companies themselves have created effective initiatives (such as the International Carbon Reduction and Offset Alliance) to guarantee the quality of offsets used in the voluntary carbon market, and that the QAS is no longer necessary.

Meanwhile, an innovation in the carbon market helps protect offset project developers against the uncertainty of changing regulations.  Previously, project developers had little recourse if a cap-and-trade scheme chose to stop trading in a particular kind of offset credit.  This vulnerability was painfully driven home for many developers when the European Union recently decided that it will ban trading in offset credits from the destruction of HFC-23 (a byproduct of manufacturing gases for refrigeration), which will make 220 million offset credits invalid at a stroke.  Now, one of Lloyd’s of London’s leading underwriters has created a type of insurance policy that will allow a bank to insure its options on future carbon credits.  This policy can provide a safety net that will boost carbon trading, help ensure the market remains liquid, and allow for confident investment in carbon offset projects.

US Policy Tracker:  I Fought the Law

A lawsuit stops California’s new cap-and-trade system in its tracks – but will it send it off the rails?

An environmental advocacy group called the Association of Irritated Residents has won a lawsuit against the California Air Resources Board (CARB), successfully blocking the implementation of the recently passed climate change law AB32.  AB32 would have introduced a state-wide cap-and-trade system, along with a host of other environmental measures.  The carbon trading system formed the basis of the lawsuit, however, as a judge ruled that CARB did not give enough consideration to possible alternatives to cap-and-trade, such as a carbon tax.  The ruling gives CARB until October to address the court’s concerns.  If the agency fails to do so, the cap-and-trade system will end up severely delayed, and could derail completely.  However, CARB is expected to appeal the judge’s ruling, which will hopefully win the agency more time to deal with the points the court case has raised.

Carbon trading is having a better time in the rest of the US, as the American National Standards Institute (ANSI) has released a new standard for sustainable furniture that rewards furniture companies for measuring and managing their carbon emissions, including using carbon offsets.  The standard e3-2010, published earlier this year, rates furniture products based on a broad range of sustainability features.  Greenhouse gas assessments and the use of carbon offsets are among the optional environmental measures that can earn products a higher rating.  As the US government – the country’s largest buyer of furniture – has begun requiring all its new furniture purchases to carry the e3 rating, the new standard is likely to become influential in the market, and the inclusion of offsets provides an interesting demonstration of offsetting’s increasing role as part of mainstream business practice.