A Response to Climate Change

Influence of Discount Rate on the Predicted Price of Carbon

The surprising (and somewhat perverse) result of modeling by some economists is that the market price of carbon need not rise much above $50 a ton (~$14/ton CO₂) by 2020. But in this case, a generous discount rate (say 6-7%) must be used to define the transfer of wealth between generations. The price in future years then needs to be significantly higher on the assumption that our children will find it easier to pay for the increased price of carbon (and environmental damage) than us !!

Influence of Discount Rate on the Predicted Price of Carbon
Reproduced and adapted from W. Nordhaus's review of the Stern Review

Other studies such as those undertaken by Stern, propose a much lower discount rate (2-3%) for the inter-generational transfer of wealth which involves paying a much higher price for carbon, typically $300-500 a ton ($80-135/ton CO₂) by 2020. For further information and discussion on the complex subject of inter-generational discount rates, consult the following material:

• Chapter 6 of Blueprint for a Green Economy
• Chapter 6 of the Stern Review
• A critique of the Stern Review by William Nordhaus
• Financial Times, Economists Forum - In spite of economic sceptics, it is worth reducing climate risk

Based on this observation, it would be interesting to see what discount rates companies in the energy sector plan to use in their future determination of investment prospects. Will values rise (say to 15%) to compensate for a perceived greater increase in risk or might they fall (say to 6-7%) to take account of future constraints on the availability of resources? Would such rates map to the inter-generational rates of return outlined above?

Reporting & Verifying Emissions

The process of recording and verifying emissions of carbon dioxide in the European trading scheme is heavily reliant on the manual recording of data to a spreadsheet and a complex system of verification. For examples, see the returns that the UK's Environment Agency require organisations to complete and the verification protocol that IETA has prepared for the EU ETS. The manual logging of values may be satisfactory for integrated pollution control, but should now be replaced so that emissions can be recorded / computed in real time and to a fiscal standard. This will become increasingly important as the volume and value of traded carbon rises.

NB: The collection of readings over 12 months, followed by a verification process lasting 3 months was responsible for a collapse in the traded price of carbon dioxide in April 2006. Once figures were released, the market realised that member nations of the EU had been granted an excess of permits. Such an overhang would have been corrected if results had been produced in real time.

It would seem that fiscal metering of fuel consumed may be a better way to go. Such an approach would eliminate a great deal of bureaucracy and support the real time reporting of data – something that both traders and the taxman should welcome!

Techniques for Measuring Emissions

There appear to be two main techniques that can be used to determine the quantity of carbon dioxide emitted by a combustion source. These are:

• Direct measurement of the exhaust gases.
• Indirect computation based on the amount of fuel consumed, its calorific value and estimating the efficiency of the combustion process using assigned emissions and oxidation factors.

Direct techniques rely on continuous emissions monitoring (CEM) to measure the amounts of gas passing to the atmosphere. Such systems and their data logging facilities are well proven, but traditionally have been used to monitor the emissions of trace contaminants such as sulphur dioxide, oxides of nitrogen and particulates, rather than the bulk discharge of carbon dioxide. A considerable body of clean air legislation has been drawn up by regulators across the World (both national and regional) and these controls set the performance standards that such equipment is required to meet. For examples, consult the US Code of Federal Regulations (CFR), Title 40 - Protection of the Environment, Chapter 1 Part 60 and Part 75.

Indirect computational techniques are cheaper, less specialist and require less maintenance than CEM equipment. Examples of methodologies that can be used to compute the amount of carbon dioxide emitted from the combustion of a fuel can be located via the following web links:

• Commission of the European Community : guidelines for the monitoring and reporting of greenhouse gas emissions (MRG)
• Australian Dept of Climate Change : National Greenhouse Accounts (NGA) Factors
• Standards and calculation tools on the GHG Protocol Initiative site.
• UK's EEMS. NB: This site directs you to the DTI’s portal and back again !!

A reluctance by industry to change from the current system of manual reporting seems to be based on a perception that CEM type metering must be used. This may be the case for the very largest emitters, but for many smaller installations it should be perfectly reasonable to use the indirect / computational approach.