Incorporating Carbon in Energy Planning at Industrial Facilities

Abstract

Climate legislation appears increasingly likely, reflected by intensifying legislative activity and two generally supportive presidential candidates. Most who track climate legislation predict that a law will be passed in late 2009 or early 2010. Regulations and emission limits are expected in 2012 or 2013, although some mandatory pre-compliance greenhouse gas (GHG) emissions reporting by “covered entities” will need to begin near term. The most significant ramification of climate legislation for industrial facilities will be that GHG emissions will, starting in the first compliance year, have a per tonne emission cost; this will either have to be paid for in (1) pass-through costs on more expensive power or fuel, (2) purchases of allowances for emissions, or (3) purchases of carbon offsets (i.e., CO2 reduction or sequestration projects to offset emissions). Although much remains uncertain as to the nature of the legislation, the inevitability of a per-tonne emissions cost makes it important to begin planning for this economic responsibility right away. If this future carbon liability is not considered in financial analysis, then projects that reduce future carbon-related expenditures may be overlooked in favor of those that will be less economically advantageous without pricing carbon cost. In this respect, it is important to “shadow price” carbon into financial forecasting, especially in capital planning. Heretofore, all planning for carbon reduction should be made against a properly documented emissions baseline, with full accommodation of the rules of carbon reduction project origination and monetization. If these rules are met in advance, pre-compliance carbon reduction projects may be eligible to earn bankable credits once climate legislation is in effect. However, if capital projects are planned and financed without proper accommodation of the crediting rules, then bankable credits will not be claimable, and the capital spending will not be as efficiently used. This paper speaks to methods of analyzing a facility’s potential greenhouse gas liability and establishing a system of greenhouse gas management that “shadow prices” carbon into financial planning. The lecture will also give a status report on carbon legislation, and a brief mention of the rules of carbon crediting, as spelled out in the most widely accepted protocol.