Ian Bateman

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Developing a Carbon Trading (or Auction) Strategy

• Ian Bateman
• Climate Change Programme Manager
• Devon County Council

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What's the relevance of 12 per tonne of
CO2? How to develop a carbon trading strategy
using Marginal Abatement Costing?
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Agenda

• Presentation (15 mins)
• Questions of clarification
• Group working (1 hour)
• Develop a marginal abatement cost curve.
• Decide a carbon trading strategy.
• Take part in a sealed bid auction for carbon
  allowances.

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Health Warning If you dont want to know the
scores... look away now!
This product contains maths!
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Background
Energy White Paper (2007) The Carbon Reduction
Commitment (CRC) will apply mandatory emissions
trading to cut carbon emissions from large
commercial and public sector organisations.
Climate Change Act (2008) Sets a legally
binding target for reducing UK CO2 emissions by
at least 26 by 2020 and UK greenhouse gases by
at least 80 by 2050 compared to 1990 levels.
Provides powers to establish trading schemes
for the purpose of limiting greenhouse gas.
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CRC Are we (you) in?
Threshold annual electricity consumption of
6,000 MWh
50,000 MWh
Best I find something out about carbon trading!!
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What is Carbon Trading?
Principal Aim Use market forces to reduce
emissions at the lowest cost to society.
How?
By placing a cap (a limit) on the CO2 emissions
allowed from a predefined market place..
.and, by auctioning off the allowable emissions,
creating a price for carbon.
This carbon price then provides the threshold
between implementing projects and buying
allowances.
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A Cap and Trade System
1 million tCO2
950,000 tCO2 allowed
50,000 tCO2 saved
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Auction or Trading Strategy
Basic Aim The business must hold sufficient
allowances at the end of the trading year to
cover its annual emissions.
Requirement Must hold allowances equivalent to
its annual emissions at the end of the
year Either buy 1000 allowances at the start
of year auction Or implement emissions
reduction projects and buy allowances to cover
the remaining emissions.

• The business must
• Know its baseline carbon footprint.
• where are we?
• Be able to project its future emissions.
• where do we want to be?
• Know its potential for reducing emissions.
• how do we get there?
• Know the cost of implementing energy efficiency
  projects in per tonne of CO2 saved.
• how much will it cost?

1000 tCO2
50 tCO2
100 tCO2
1000 tCO2
1000 tCO2
950 tCO2
950 tCO2
850 tCO2
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The Market Price
No emissions reduction
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Summary of Carbon Trading
To reduce carbon emissions at the lowest cost
to society
Effectively, for an organisation in a carbon
trading system, its no longer about the
relentless pursuit of a carbon reduction
target. The market will do it!
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Relevance of 12 per tonne
To reduce carbon emissions at the lowest cost
to society
Project cost gt 12 per tonne cheaper to buy
allowances
Project cost lt 12 per tonne cheaper to
implement
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Calculating Project Costs
So how do I work out the cost of my projects?
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Is a CFL Cost-Effective?
12 per tonne of CO2
Carbon Saving A 49 watts (60w replaced by
11w) B - 1000 hours (highest use light) C 0.523
kgCO2 per kWh A x B x C 26kg
Project cost 5
No Brainer!
192 per tonne of CO2
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Calculating Project Costs
but what about the cost of the energy I have
saved?
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Is a CFL Cost-Effective?
12 per tonne of CO2
Project cost 5
Annual Energy Saving A 49 watts (60w replaced
by 11w) B - 1000 hours C 9.627p per kWh A x B
x C 4.72
No Brainer!
Payback period just over 1 year
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Is a CFL Cost-Effective?
12 per tonne of CO2
1st year Cost 5.00 - 4.72 0.28
1st year Carbon Saving A 49 watts B - 1000
hours C 0.523 kgCO2 per kWh A x B x C 26kg
10.77 per tonne of CO2
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Whole life costs?
But surely the light bulb makes savings in years
2, 3, 4 etc?
..and at no additional cost?
..and you dont have to buy so many
replacements ?
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Is a CFL Cost-Effective?
12 per tonne of CO2
Whole-life Cost (Saving) 5 - 47.20 - 1.60
-43.80
Whole-life Carbon Saving A 49 watts B - 10000
hours (10 yr life) C 0.523 kgCO2 per kWh A x B
x C 256kg
- 171 per tonne of CO2
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Time Value of Money ( Carbon)
Principle With all else being equal an
investor prefers to receive a payment of a fixed
amount of money today, rather than an equal
amount in the future.
The Net Present Value The value of a future sum,
"discounted" to a present value.
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Discounted Methodology
Marginal Abatement Cost (MAC) Curve Methodology
Discount Rate 10 (6) Project Life 10 years
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Is a CFL Cost-Effective?
- 162 per tonne of CO2
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Voltage Optimiser
- 72 per tonne of CO2
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Street Lighting
Annual allocation for carbon emissions
reduction 200k
66 tCO2
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Street Lighting
380 per tonne of CO2 Simple Payback 26 years
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The MAC Curve

• Carbon Trading Strategy
• Price - 12 per tonne.
• 21 tCO2 can be saved.
• Purchase allowances for remaining emissions.

Not cost-effective projects
E
B
Cost () per tonne of CO2
C
F
Cost-effective Projects
D
A
Tonnes of CO2 saved
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MACC for DCC
and now its your turn!
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Questions
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Group Work

• TASK 1
• To create a Marginal Abatement Cost Curve.
• TASK 2
• To use the MACC to bid for allowances in a sealed
  bid auction.

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MACC Data
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MACC Chart
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Sealed Bid
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(No Transcript)
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Answer - Task 1
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Possible Answer Task 2
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The Low Energy Light Bulb Test
How much would you pay for one of these?
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10
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Questions