Memorandum submitted by Sindicatum Carbon
Capital
INTRODUCTION
— Sindicatum Carbon Capital (SCC) welcomes
the Environmental Audit Committee's emphasis, throughout this
Parliament, on climate change-related issues. It also welcomes
the opportunity to contribute to this important Committee inquiry.
It believes that the inquiry is timely, too, with 2008 marking
the third anniversary of the Kyoto Protocol coming into effect
(in February).
— SCC supports both the Kyoto Protocol
and the new "global green currency" system which it
created, through the introduction, for example, of carbon pricing
and credits for reductions in the emission of greenhouse gases
(GHG). Similarly, SCC welcomed the emphasis on market-based solutions
to environmental challenges that was contained in last year's
very positive report from the Commission on Environmental Markets
and Economic Performance.
— The timeliness of the Environmental
Audit Committee's inquiry is demonstrated by the fact that 2008
is likely to be the year in which the generation, carbon market
capitalisation will pass the $1 trillion mark worldwide.[5]
Sindicatum believes that the scale of this market, and London's
leading role within it, is poorly understood.
SINDICATUM CARBON
CAPITAL
— SCC is a UK-based developer of pollution
abatement projects in the global emerging markets. It provides
a combination of finance, technical expertise and project management
to develop major, cost-effective greenhouse gas reduction projects.
SCC's shareholders include Citigroup, AIG (the world's largest
insurer), and Black River Asset Management (a wholly-owned subsidiary
of Cargill).
— Areas of specialisation include abating
Greenhouse Gas (GHG) emissions from the oil and gas, chemicals,
waste management and natural resource sectors, as well as energy
efficiency. SCC's commercial strategy is to provide its shareholders
with strong capital growth combined with a manageable risk profile
through direct investment as an "end-to-end" developer
in projects that reduce greenhouse gases and, as such, result
in the "manufacture" of environmental commodities and
in the generation of cleaner power. The company uses its experienced
management team to select the best investment opportunities and
to deploy advanced and best-of-breed technologies to become the
preferred partner and source of capital to qualifying asset owners
worldwide.
— SCC has detailed knowledge of the
economic incentives, created by the Kyoto Protocol, which can
encourage both developed and developing countries to reduce their
greenhouse gas emissions. SCC believes that people, companies
and governments are not going to reduce pollution just because
there are rules urging them to do so; they are going to reduce
it because of the financial incentives and benefits of doing so.
Our response will focus on the Committee's questions
as far as SCC's experience is relevant.
1. Is the Kyoto Protocol still a relevant
and effective mechanism? How successful was the Bali conference?
Does the roadmap contain all that is needed to lead to a post-Kyoto
agreement that adequately addresses the climate change challenge?
Will the roadmap focus on implementation issues or will it come
to an agreement on a stabilisation level? How do we ensure that
no key parties are left out of the process?
SCC believes that the Kyoto Protocol remains
a relevant and effective mechanism through which global greenhouse
gas emissions can be reduced. SCC believes that a market-based
mechanism is the only way in which deep and wide-ranging cuts
in greenhouse gas emissions can be delivered within the timescale
that the International Panel on Climate Change (IPCC) tell us
is required. The Bali Conference was a success in that it continued
progress towards a second commitment period but was disappointing
in that it stopped short of setting any new targets.
However, with the political situation in the
US, any agreement was always going to be weak, and the Parties
must now strive to build on the changes in attitude that a new
US Administration may bring to the table. The best way of ensuring
that no key parties are left out of the process is to demonstrate
that:
— greenhouse gas emission reductions
and caps on emissions do not impose significant costs or burdens
on economies;
— there are positive benefits of reducing
greenhouse gas emissions in the form of reduced energy costs;
and
— reduced energy consumption is a strategic
goal closely aligned to energy security
2. What needs to be done between now and
Poznan? Emissions from international aviation and shipping were
not included in the Bali roadmap. Why did this happen and what
can be done to address these emissions?
Successful climate change mitigation will require
action on a global scale and, in particular, it requires massive
investment in new technology, research and development delivering
significant results within a short time period. We believe that
it is important to focus immediately on those sectors which have
the potential make a significant contribution to global greenhouse
gas emissions in the short term. Consideration must be given to
immediate climate control mitigation policies, such as methane
emissions and emissions of other industrial gases, whilst longer
term targets are established using technologies such as CO2
sequestration, energy efficiency and renewable and nuclear energy.
In order to address the climate change challenge,
SCC has invested heavily in specialist teams operating in key
areas where we believe that opportunities exist to significantly
reduce greenhouse gas emissions in the short to medium term; these
are land-fill gas, coal mine methane, energy and industrial emissions,
and oil and gas.
Globally, landfills are the third largest source
of man-made emissions. Methane from landfills and coal mines is
21 times more powerful than carbon dioxide at affecting global
warming. In the coal mining sector, methane also represents a
major safety problem for miners and loss of value for mine owners.
By 2020, the world's coal mines are expected to produce annual
emissions of 153 million metric tons of CO2 equivalent
in the form of un-treated or un-utilized methane.
International shipping and aviation were excluded
from the scope of the Kyoto Protocol because, by definition, they
arise outside national boundaries and are not considered to be
the responsibility of any one nation. The International Air Transport
Association (IATA) and the International Maritime Organization
(IMO) were both given responsibility for progressing the issue
within their respective industries, but little progress has been
made to date. Both sources could be included simply by agreement
between the countries hosting the port of origin and the port
of destination, as is now being proposed for aviation within the
European Union Emissions Trading Scheme (EU ETS). There are also
technologies that will deliver incremental reductions in greenhouse
gas emissions in both industries and a system of international
cap and trade could be used to limit the impact of growth in emissions.
EMISSION REDUCTION
FRAMEWORKS
3. How can "common but differentiated
responsibilities" be decided in such a way that ensures the
engagement of all parties? How can equity concerns regarding the
allocation of mitigation targets and historical responsibility
for climate change emissions be reconciled?
A large part of the answer lies in the provision
of technology and investment by Annex I parties to Non-Annex I
parties, to help the latter to develop in less greenhouse gas
intensive ways. Helping Non-Annex I Parties avoid lock-in to carbon
intensive technologies now, will benefit them greatly in the future.
For example, helping such countries develop efficient mass rapid
transport systems will help them avoid the misery of traffic congestion.
Allocation is a function of historic emission
levels and the availability of technology to reduce greenhouse
gas emissions. Whilst allocation is an emotive issue, the European
Commission has gained considerable experience in the allocation
of EU Allowances (EUA) through the National Allocation Planning
process. Guidance should be taken from the European Commission's
experience to date. Above all, the ultimate goal and the likely
cost of failure to act should be borne in mind.
Equity concerns are addressed through the provision
of flexibility mechanisms, giving parties options as to how they
achieve their targets. Domestic action and trade are, of course,
the main flexibility mechanisms and the Clean Development Mechanism
(CDM) has shown that there is a plentiful supply of additional
emission reductions that can be used to take the brunt of equity
concerns. Maintaining an appropriate price for carbon is key so
that Parties and industries can make the required cuts without
significant financial costs.
4. How might an agreement be reached with
emerging economies to ensure that their emissions trajectories
move into line with the need to reduce global emissions? How might
developing countries' need to expand their economies be reconciled
with controls on emissions?
Emerging economies must be helped in order to
avoid being locked into high greenhouse gas emission positions.
This can be achieved through the provision of technology and investment.
In practice this should, for example, involve carbon capture and
sequestration; a more beneficial and practical approach to recognising
the storage of carbon in forests; greater support for the implementation
of hydro power (instead of excluding it from the EU ETS through
the application of the World Commission on Dams Guidelines); and
wind and solar power applications.
Of the emerging economies, China is by far the
most significant. China accounts for 77% of world's growth in
coal consumption, and coal production will double by 2020 if its
economic growth is maintained. China will be dependent on coal
for about 70% of its power generation for the foreseeable future.
China must be convinced that concerted international action on
climate change is not a ruse to restrain its economic potential.
This can be achieved by demonstrating that partnerships such as
that between SCC and Shanxi Coking Coal Group are mutually beneficial.
(See question 5 for more detail).
Methane emissions from coal mining can be substantially
reduced by a combination of established and emerging technologies.
Using technology pioneered by SCC, near-zero methane emissions
coal mining is a practicable proposition and should be promoted
as an important intermediate climate control mitigation policy
ahead of CO2 capture and sequestration.
ADAPTATION AND
TECHNOLOGY
5. Is there adequate support for developing
countries to adapt to climate change? Should there be binding
targets for funding and how could these be decided? How will funding
for climate change mitigation or adaptation interact with existing
aid budgets? Will such funding contribute to wider sustainable
development goals?
Adaptation to climate change needs to take place
in hundreds of thousands of individual installations across dozens
of countries. The kinds of actions can be broadly divided into
non-CO2 abatement and CO2 abatement activities.
The former include potent gases such as sulphur hexafluoride (SF6),
hydrofluorocarbons (HFC23), di-nitrous oxide (N2O) and Methane
(CH4), whilst the latter is CO2—usually from
the combustion of fossil fuels. Many of the non-CO2
abatement activities have already been addressed by the market
mechanisms under the Clean Development Mechanism (CDM) because,
particularly in the case of HFC23 and some N2O projects, they
are massively profitable when carbon prices are in excess a $2
or $3 per tonne CO2e. Joint Implementation (JI) has
yet to deliver on these.
In retrospect, some of these activities could
have been addressed via a global fund such as the Global Environment
Facility (GEF) because, by and large they are non-revenue generating
and are the result of un-intended industrial developments. CO2
emission reductions come from energy efficiency programmes and
renewable energy, which have an underlying financial driver (although
there are also significant CO2 emissions from some
processes such as cement manufacture, which are harder to reduce
because the CO2 comes from chemical reactions which
are fundamental to the products). It has already been shown that
with a CDM element, many such programmes can be encouraged Carbon
Capture and Sequestration (CCS) is somewhat similar to the former
category of Non-CO2 GHG abatement projects. There are
no revenues involved; the quantities of greenhouse gas emission
reductions are potentially very large and consequently they have
the potential to impact upon the distribution of wealth. CCS could
be dealt with via an international fund delivering benefit for
the world's population without distorting trading regimes.
The developing counties are right to demand
that official development assistance is not used to pay for greenhouse
gas emission reduction activities, because to do so would simply
support the donors' standard of living.
SCC believes that successful climate change
mitigation can most efficiently be achieved by encouraging market-based
solutions, underpinned by a secure regulatory framework. SCC harnesses
the profit incentive in order to help developing countries respond
to the challenge of reducing greenhouse gas emissions. SCC is
a major player in promoting the development and implementation
of new technologies in mitigation of greenhouse gas emissions.
Unlike other project developers, SCC takes a principal position
in its projects, using its capital and technology to create long-term
emissions reductions, which generate emissions credits—as
opposed to buying forward credits. These are sold on in the market
and the profits are fed back to SCC investors.
Taking our "near-zero" methane emissions
coal mining project as an example, SCC encourages participation
from developing and transitional countries by providing selected
project owners with:
— Full technical support during project
implementation to ensure project delivery and maximisation of
emission reductions.
— Priority allocation of new and innovative
mitigation technologies developed by SCC.
— A gas drainage audit report which
provides recommendations and assistance in enhancing gas capture
and quality.
— Technology transfer and training.
— Generation of electricity & heat,
often in areas of unreliable supply.
— Creation of additional revenue streams
by selling carbon credits and electricity.
— Attractive commercial terms at low
risk.
SCC will identify and introduce new technology
where existing equipment and practices are limiting gas capture
performance. SCC believes this is the kind of support that developing
countries require to tackle their greenhouse gas emission effectively.
Methane from coal represents 8% of worldwide
greenhouse gas emissions and China is the world's largest coal
producer, mining almost nine times more coal from underground
longwalls than the USA—the second largest coal producer
in the world. China emits over 43% of the global methane released
by coal mining and this could rise to more than 50% by 2020, representing
450 million tonnes CO2e. At best, conventional approaches
will mitigate 15% of this amount. More than 70% of methane released
by coal mining is diluted to safe, low concentrations (generally
< 1%) by ventilation air. SCC has developed a near-zero methane
emissions coal mining strategy which can be widely replicated
to achieve significantly greater reductions.
SCC believes that its holistic approach of maximising
gas capture, optimising utilisation of drained gas, flaring surplus
methane and destroying Ventilation Air Methane (VAM) at the surface
exhaust fans will ultimately facilitate near-zero methane emissions
coal mining. These projects qualify for carbon credits under the
Kyoto Mechanisms and Voluntary schemes, making them economically
sustainable.
6. Is there effective international coordination
on technology R&D? How might technology transfer to developed
countries be improved? How does technology transfer interact with
international trade rules? How effectively do Government technology
programmes, such as the Energy Technologies Institute, lead to
technology development and transfer to developing countries? How
effective are UK Government measures to assist developing countries
to reduce emissions?
In not agreeing to host Joint Implementation
(JI) projects, the UK Government is failing to show leadership
to other countries. In the Climate Change Bill, the Government
justified the exclusion of non-CO2 greenhouse gases
from the EU ETS and its refusal to host JI projects on the grounds
that the sources of gas were too small and technologies were not
available to reduce the emissions. However, SCC feels that the
purpose of a market-based mechanism is to stimulate the development
of new technologies. The fact that sources of greenhouse gases
are insignificant in the UK does not mean that the UK Government
should not promote technologies that may be of benefit in other
countries and which the UK could export to those countries, either
through the private sector under CDM and JI or through Government-sponsored
programmes.
In this respect, SCC is promoting the abatement
of Ventilation Air Methane from coal mines, of which there are
several notable sources in the UK. But without JI, there is no
mechanism to implement such a technology in the UK.
7. Is the Asia-Pacific partnership a complement
or a rival to the Kyoto Protocol? How is it likely to develop
and what is it likely to achieve?
No SCC position.
MECHANISMS
8. How might mechanisms to tackle emissions
from deforestation be developed? How can we ensure that such mechanisms
contribute to wider sustainable development aims? Will such mechanisms
deal with the need to ensure the protection of indigenous people,
land use rights and governance? How might forest degradation be
dealt with? Are additional mechanisms required to enable the creation
of carbon sinks?
Under the Kyoto Protocol, Annex I Parties are
required to account for the changes in stocks of carbon stored
in various land-use activities. As a result, a decrease in carbons
stored in forests is counted as an emission of carbon, to be made
up with excess Assigned Amount Units (AAUs). There is no theoretical
reason why the same approach could not be undertaken in Non-Annex
I Parties where an increase in forest cover and carbon stored
in the forests is rewarded through the existing cap and trade
mechanisms; a decrease in carbon stock need not be penalized.
Such a positive approach would encourage developing countries
to change their land-use policies. The links to sustainable development
and conservation of biodiversity are very significant and too
numerous to elaborate here.
The mechanism that is required is wall-to-wall
accounting of forest carbon stocks with reward for increases in
carbon stocks, via the international cap and trade markets, at
a government to government level. There are issues to be addressed,
such as catastrophic loss of carbon through drought and fire,
for instance, and the size of the task to inventory carbon stocks,
but the scale of the problem means that it merits considerable
attention and political resolve.
9. Are the Clean Development and Joint Implementation
Mechanisms functioning effectively? How might they be improved?
How might they better be used in relation to forestry or other
land use emission reduction projects? Should CDM and JI projects
play a greater role in sustainable development more widely? To
what extent should credits such as those from the CDM and JI be
permitted to be used in emissions trading schemes, or contribute
to emissions reduction targets?
CDM and JI are the two main flexibility mechanisms
within the Kyoto Protocol. They play several fundamental roles.
For example, they provide a route of participation for Non-Annex
1 countries; they also provide a flexible project-based mechanism
driven by the private sector, which can quickly and efficiently
allocate resources to find the most cost-effective means of reducing
emissions.
At the outset of the Kyoto negotiations, a reduction
in greenhouse gas emissions amounting to one tonne of carbon dioxide
equivalents (CO2e) was considered equivalent to another,
irrespective of whether they were generated from a HFC 23 abatement
facility in China or a small-scale renewable energy project in
Africa. The justification for this was that both actions have
the same environmental impact and the market was the means of
allocating resources most efficiently to achieve global reductions
at the lowest cost.
More recently, and most recently in the EC's
guidelines for Phase 3 of the EU ETS, there is an increasing discrimination
between emission reductions of different kinds. First, the EU
ETS excluded forestry-based credits, then the World Commission
on Dams (WCD) guidelines were cited as a screening tool for all
hydro power dams over 20 MW. In the most recent guidelines, there
is a distinct preference for renewable energy and energy efficiency
credits. The WCD guidelines are not an effective means of assessing
hydro dams because there is no international dam certification
programme; the guidelines are unwieldy and do not make adequate
provision for dams which are already under construction without
adhering to the guidelines.
SCC believes that limiting the access to CDM
and JI credits, in order to address the issue of supplementarity,
the Parties have unwittingly undermined the value of the flexibility
mechanisms. The Kyoto Protocol is about reducing global greenhouse
gas emissions and promoting sustainable development, but, through
the Linking Directive and rules on supplementarity, more emphasis
has been placed on domestic interests above the over-reaching
goal of reducing greenhouse gas emissions.
It is true that industrial gas abatement projects
contribute little other than tax revenues to the host country's
sustainable development benefits; however, contribution to sustainable
development is a sovereign issue. In conclusion, relatively un-limited
access to CDM and JI credits would have the dual benefits of enabling
Annex 1 Parties to make deeper cuts in greenhouse gas emissions
without imposing significant costs on industry and the promotion
of sustainable benefits in Non-Annex I countries.
SCC currently has one Clean Development Mechanism
(CDM) project under review by the mechanism's Executive Board.
This Indonesian-based project, in conjunction with Indonesian
gas company Odira, captures associated gases from oil production
at the Tambun and Pondak Tengah oil fields in West Java. The captured
gas is then piped into the gas distribution network; previously
it would have been flared.
The Clean Development Mechanism rewards voluntary
reductions in GHG emissions from flaring. Flaring emissions are
currently estimated to be 300 million tons of carbon dioxide equivalents
(CO2e) per year. Our specialist Flaring Reduction team
works with resource owners to identify appropriate development
solutions for natural gas capture and utilisation projects—qualifying
the projects, in the process, for carbon credits under the Clean
Development Mechanism. SCC's Flaring Reduction team seeks to offer
an integrated CDM project development solution based on:
— Access to industry best practice
in technology, operations and programme management.
— Infrastructure development.
— Access to appropriate technologies.
— Access to economic value from the
associated gas.
10. What action is the Government taking
to prepare for and accelerate the linking of the EU Emissions
Trading Scheme with other trading schemes? Is a new institutional
or regulatory framework required to enable their development and
coordination? How might schemes be linked where they have different
emission caps? Might the EUETS be undermined by linking with other
schemes?
The only threat to the EU ETS is linkage to
schemes that allow non-additional projects to generate credits
that are interchangeable with EU Allowances, Certified Emission
Reductions (CERs) or Emission Reduction Units (ERUs). Different
levels of emission caps are a short term issue; the key point
is that participating countries should all be making sufficiently
deep cuts in emission allowances and auctioning an increasing
proportion of those allowances to ensure that industries do not
benefit from distortions in international trade and windfall profits.
CONCLUSION
The market for environmental allowances, an
emerging asset class, is approaching $1 trillion in market capitalisation.
This is equivalent to the stock market capitalisation of the Toronto
Stock Exchange, the seventh largest in the world, or to half of
the total size of the companies traded on the London Stock Exchange.
SCC believes that a valuation approaching $1 trillion reflects
the growing importance of markets for pollution permits and credits.
A figure of this size is noteworthy and something worth celebrating.
The $1 trillion total speaks volumes for the
commitment from policy-makers, regulators, business leaders and
a host of other players to make emissions trading the tool of
choice to tackle environmental resource allocation. Momentum of
this magnitude cannot fail to attract a high level of attention
from the financial markets and we can already see many innovative
mechanisms being applied to environmental issues.
In 2007, the United Nations Framework Convention
on Climate Change (UNFCCC) announced that the CDM was on course
to generate 1 billion certified emission reductions (CERs) by
the end of 2012. This figure does not incorporate the risk of
project under-performance or failure, but more projects are in
the pipeline, so it is probably not unrealistic. Assuming an average
price of $10 per CER (which represents one tonne of CO2e),
this market is currently valued at around $10 billion to the end
of 2012.
These figures reflect that an increasing proportion
of the world's economy is recognising and quantifying significant
environmental assets and liabilities which, 10 years ago, were
not even on the agenda. The industry which has emerged to capitalise
on this market, underpinned by the generation and trade in carbon
credits, in which SCC is a leading player, demonstrates both the
relevance and the effectiveness of the mechanisms.
GLOSSARY
Annex I Parties
The industrialized countries listed in the annex
to the Convention on Climate Change that were committed to return
their greenhouse-gas emissions to 1990 levels by the year 2000
as per Article 4.2 (a) and (b). They have also accepted emissions
targets for the period 2008-12 as per Article 3 and Annex B of
the Kyoto Protocol. They include the 24 original OECD members,
the European Union, and 14 countries with economies in transition.
(Croatia, Liechtenstein, Monaco, and Slovenia joined Annex 1 at
COP-3, and the Czech Republic and Slovakia replaced Czechoslovakia.)
Assigned Amount Unit (AAU)
A Kyoto Protocol unit equal to 1 metric tonne
of CO2 equivalent. Each Annex I Party issues AAUs up
to the level of its assigned amount, established pursuant to Article
3, paragraphs 7 and 8, of the Kyoto Protocol. Assigned amount
units may be exchanged through emissions trading.
Certified Emission Reductions (CER)
A Kyoto Protocol unit equal to 1 metric tonne
of CO2 equivalent. CERs are issued for emission reductions
from CDM project activities. Two special types of CERs—called
temporary certified emission reduction (tCERs) and long-term certified
emission reductions (lCERs)—are issued for emission removals
from afforestation and reforestation CDM projects.
Clean Development Mechanism (CDM)
A mechanism under the Kyoto Protocol through
which developed countries may finance greenhouse-gas emission
reduction or removal projects in developing countries, and receive
credits for doing so which they may apply towards meeting mandatory
limits on their own emissions.
Emission Reduction Unit (ERU)
A Kyoto Protocol unit equal to 1 metric tonne
of CO2 equivalent. ERUs are generated for emission
reductions or emission removals from joint implementation projects.
EUA
EU Allowance (C02-emissions).
Global Environment Facility (GEF)
GEF is an independent financial organization,
established in 1991, that provides grants to developing countries
for projects that benefit the global environment and promote sustainable
livelihoods in local communities. GEF grants support projects
related to biodiversity, climate change, international waters,
land degradation, the ozone layer, and persistent organic pollutants.
Greenhouse Gases (GHGs)
The atmospheric gases responsible for causing
global warming and climate change. The major GHGs are carbon dioxide
(CO2), methane (CH4) and nitrous oxide (N20). Less
prevalent but very powerful greenhouse gases are hydrofluorocarbons
(HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6).
Non-Annex I Parties
Refers to countries that have ratified or acceded
to the United Nations Framework Convention on Climate Change that
are not included in Annex I of the Convention—mostly developing
countries.
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