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Transcript of Estimating Investment Risk and Market Potential for Greenhouse Gas Abatement Steven Rose Global...
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
3© 2011 Electric Power Research Institute, Inc. All rights reserved.
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).
4© 2011 Electric Power Research Institute, Inc. All rights reserved.
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
5© 2011 Electric Power Research Institute, Inc. All rights reserved.
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
6© 2011 Electric Power Research Institute, Inc. All rights reserved.
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
7© 2011 Electric Power Research Institute, Inc. All rights reserved.
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
8© 2011 Electric Power Research Institute, Inc. All rights reserved.
New Data for Economic Modeling – Investment Risk
9© 2011 Electric Power Research Institute, Inc. All rights reserved.
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.
10© 2011 Electric Power Research Institute, Inc. All rights reserved.
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.
11© 2011 Electric Power Research Institute, Inc. All rights reserved.
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.
12© 2011 Electric Power Research Institute, Inc. All rights reserved.
Implementation and Scenarios
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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
14© 2011 Electric Power Research Institute, Inc. All rights reserved.
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
Preliminary. Not for citation.
15© 2011 Electric Power Research Institute, Inc. All rights reserved.
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
16© 2011 Electric Power Research Institute, Inc. All rights reserved.
Sample of Latest Results
US Agriculture & Forestry
17© 2011 Electric Power Research Institute, Inc. All rights reserved.
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%
Preliminary. Not for citation.
18© 2011 Electric Power Research Institute, Inc. All rights reserved.
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
Preliminary. Not for citation.
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%
19© 2011 Electric Power Research Institute, Inc. All rights reserved.
Sample of Latest Results
International Agricultural Non-CO2
20© 2011 Electric Power Research Institute, Inc. All rights reserved.
-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)
Preliminary. Not for citation.
Reduced supply due to delivery risks and
lack of intl ag protocols
21© 2011 Electric Power Research Institute, Inc. All rights reserved.
-20
0
20
40
60
80
100
120
0 100 200 300 400 500 600 700
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)
Preliminary. Not for citation.
Non-Annex 1 has largest potential but greatest risk
Non-Annex 1Annex 1
22© 2011 Electric Power Research Institute, Inc. All rights reserved.
-20
0
20
40
60
80
100
120
0 100 200 300 400 500 600 700 800 9002020 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)
Preliminary. Not for citation.
Market (Tradable)
Increased supply with country assurance
(vs. CDM)
23© 2011 Electric Power Research Institute, Inc. All rights reserved.
-20
0
20
40
60
80
100
120
0 100 200 300 400 500 600 700 800 9002020 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)
Preliminary. Not for citation.
Market (Tradable)
Market (Improved, CDM/JI & Tradable)
Increased supply with improved institutions
and protocols
24© 2011 Electric Power Research Institute, Inc. All rights reserved.
Sample of Latest Results
International Forestry
25© 2011 Electric Power Research Institute, Inc. All rights reserved.
-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
Preliminary. Not for citation.
26© 2011 Electric Power Research Institute, Inc. All rights reserved.
Offset Market Potential Supplye.g., International Forest Carbon
Cumulative Additional Forest Carbon (through 2090)
Preliminary. Not for citation.
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
27© 2011 Electric Power Research Institute, Inc. All rights reserved.
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
28© 2011 Electric Power Research Institute, Inc. All rights reserved.
Discussion
Steven Rose Tel: 202-293-6183Email: [email protected]