Perspectives on Various Issues of Interest

Thoughtful

The Innovative Carbon Market

1. Consider this: Every year the average sow and her piglets produce 9.2 tons of carbon-dioxide equivalent through the methane emissions from their effluent. In the past, that has been a problem both for the environment and for pig-farmers. In developing countries the pig-effluent collects in open lagoons which smell bad and get infested with flies. Sometimes it flows straight into nearby water systems. This has now turned into an opportunity. Bunge, an agricultural-commodities business based in America, builds lines and enclosed pools to collect the effluent and captures the methane that it emits. The farmer can use the gas to generate electricity. By preventing methane from escaping into the atmosphere, Bunge creates a credit which it can sell on the carbon market. The farmer gets to keep 20-30% of the value. Bunge has 40 such projects operating in Brazil and is planning to expand into Mexico, Guatemala, Peru and the Philippines.
2. Although carbon market operates like a commodity market, what is being bought and sold does not exist. The trade is not actually in carbon but in not-carbon: in certificates establishing that so many tones of carbon dioxide (or the equivalent in other greenhouse gases) have not been emitted by the seller and may therefore be emitted by the buyer.
3. The purpose of setting up the market was, first, to establish a price for the carbon and second, to encourage efficient emissions reductions by allowing companies which would find it expensive to cut emissions to buy credits more cheaply.
4. The carbon price was established by the European Emissions-Trading Scheme (ETS).
5. The supply of carbon credits comes principally from two sources:
   1. The first is the allowances given to companies in the five dirty industries covered by the ETS (electricity, oil, metals, building materials and paper).
   2. The second source of carbon dioxide lies outside Europe. The European Commission linked the ETS to the “clean development mechanism” (CDM) set up under the Kyoto protocol. This provides for emissions reductions in developing countries – such as those on the Latin American pig farms – to be certified by the UN. Such “certified emissions reductions” (CER) can then be sold.
6. The carbon trade is now sizeable. Some €22.5 billion-worth ($30.4 billion) of allowances were traded last year, according to Point Carbon, a data-provider, representing 1.6 billion tones of carbon dioxide – a huge increase on the €9.4 billion traded in 2005. Europe’s ETS made up about 80% of the total value.
7. Developing country CERS accounted for about €4 billion of last year’s trade: 562m tones of carbon dioxide.
8. According to New Carbon Finance, a research company, carbon funds worth $11.8 billion have been raised so far. Half of that total is managed from London. Climate Change Capital, a niche investment bank, raised $130m for its first carbon fund, launched in July 2005; its second, launched a year later is now worth around $1 billion. According to Tony White of Climate Change Capital, all of money for the first fund came from hedge funds, which like risk. By the time the second fund was established, more cautious investors, such as pension funds and banks, were prepared to put money into it. The money has gone mostly into projects in developing countries to produce CERS. Bunge’s Brazilian pig-farmers are making CERS out of their animals’ effluent. But the bulk of the investment has gone into greenhouse-gas capture in China.
9. The most potent greenhouse gas is HFC-23, a by-product of HCFC-22, a chemical used in, among other things, fridges. Its global warming effect is, ton for ton, 11,700 times greater than that of carbon dioxide, so it is good to get rid of it, and cheap too; capturing and burning it off costs less than €1 for the equivalent of one ton of carbon dioxide. These days China produces most of the world’s HFC-23. That-along with the fact that the Chinese government is efficient to deal with – explains why 53% of the total volume of CDM projects in 2006 – worth around €3.5 billion in total – went to China.
10. The very cheapness of cutting emissions of HFC-23 makes the trade controversial. Credits costing less than €1 to produce have been sold on the market for up to €11. Factories have found that their damaging by-product, HFC-23, can be more valuable than their main output.
11. The Chinese government realizing how much money there is in this business, has imposed a tax of 65% on revenues from it, and in February this year it launched its own $2 billion CDM fund.
12. Of the 65% of companies surveyed by Point Carbon earlier this year which claimed that the ETS has led them to abate their emissions (up from 15% the previous year), most were planning to buy credits rather than cut their own emissions. Yet the ETS was intended to cut European emissions as well as Chinese ones.
13. The carbon price has delivered some of the innovation that it was supposed to.
    1. Shell, for instance, is pumping carbon dioxide from a refinery in the Botlek area of the Netherlands into 500 greenhouses producing fruit and vegetables, thus avoiding emissions of 170,000 tons of carbon dioxide a year and saving the greenhouse owners from having to burn 95m cubic meters of gas to produce the carbon dioxide they need.
    2. Alcan, an aluminum company, is planning to use the heat from one of its smelters to increase the efficiency of its power generation plant at Lynemouth in Nothumberland in Britain. Wyn Jones, managing director of Alcan’s British smelting and power-generation operations, says this will save 150,000 tons of carbon dioxide a year (€3m if the price of carbon dioxide is around €20 a ton, as Alcan expects) and 60,000 tons of coal (₤2.1m, or $4.2m, at around ₤35 a ton). The project is expected to have a payback period of around five years.
14. Some issues to think about:
    1. Chinese CERS are too cheap and the carbon price is too low and too volatile. Even when it was bouncing around at €15-25, it did not seem to encourage much new investment.
    2. According to Bjoern Urdal of Sustainable Asset Management who took a detailed look at the effects of the carbon price on the German electricity market last year, replacing old coal-fired power stations with gas-fired ones became worthwhile only at a carbon price of €33. He has not done the sums since last November, when the European Commission chucked out Germany’s “transfer rule” (which would have exempted new coal-fired stations from the ETS for 14 years), but reckons the break-even point will have come down to more like €25.
    3. The European Commission’s “transfer rule” and the decision to slash national governments’ planned allocations to industry for the period 2008-2012 have helped raise the carbon price. The price of phase two allowances has risen to a level high enough to get some power generators to switch from coal to gas at the margin when the gas prices is moderate; but not high enough to get them to replace coal-fired power stations with gas-fired ones – nor to encourage much of the innovation that carbon trading had been expected to spawn.

Source: The Economist, June 2^nd 2007. (“Trading thin air” pp. 8-10)

Supply Chain Issues at Airbus

1. Louis Gallois, the boss of EADS, the Franco-German aerospace consortium that owns Airbus, reiterated the warning raised by the planemaker’s CEO, Tom Enders. Due to the decline in dollar, the companies is seriously considering moving a large part of its production to low cost countries.
2. The delay in delivering the A380 superjumbo is planned to be offset by laying off 10,000 employees and the sale of several plants. The assumption behind the plan was that a euro was worth $1.35, not the prevailing $1.47.
3. Gallois estimates that each 10-cents rise in the euro costs Airbus 1 billion euros.
4. Currently, Airbus makes 76% of its purchases within Europe and generates 60% of its sales elsewhere. Due to the rising value of the euro, some production must now be shifted to low cost countries.
5. In 2008 Airbus is opening an assembly line for the single-aisle A320 in China, followed by a second site for making composite components.
6. The conversion of A320 passenger aircraft into a cargo variant will take place in Russia. About 5% of work on new A350 will also be done in Russia.
7. Airbus is also in negotiation with Japanese companies to take on more than 5% of the work on A350.
8. Mr. Gallois suggests that when the A350 enters service in 2013, 70% of it will have been “purchased” in dollars as compared to 50% for the A380 and an average 24% of Airbus production today.
9. About 50% of the A350’s production will be outsourced. Successors to the A320 aircraft may be made almost entirely outside the euro-zone.
10. Apart from the exchange rate issue the reasons for outsourcing include: tapping composite manufacturing expertise.
11. The company insists that it will not replace the mistakes made in the case of Boeing’s 787 Dreamliner, 80% of which has been outsourced.

Source: Economist, December 8^th 2007 – “Opposite headings? Why both Boeing and Airbus are grumbling about their supply chains, pp. 74-75.

Does the Size of a Firm Aid in Renewable Energy Initiatives?

1. British Petroleum (BP) has been producing solar cells in a small way, for 30 years. Now it is investing in Beyond Petroleum initiative.
2. In a joint venture with India’s Tata, BP expects to produce 300 MW of solar cells a year by 2010. In March 2007, BP announced that it will build a 300 MW factory in Spain. Through a joint venture with Clipper, an American turbine manufacturer, BP plans to turn itself into a significant wind-power generator.
3. In 2008, BP plans to devote 4% of its capital on renewable, which amount to approximately $800 million – a substantial amount for most renewables companies. Exxon on the other hand want to concentrate on its core competency i.e. the petroleum business. Technology will in part determine which company’s strategy will pay higher dividends. If renewable energy goes on getting cheaper, it will get more attractive. According to Vlatko Vlatkovic, head of GE’s renewable energy research, wind power is heading towards 3-4 cents per kWh. To achieve this it is necessary to increase the length of turbine blades to 90 meters. Currently, the weight of the central positioned between the blades is at around 300 tonnes, which makes it unviable to scale up. Lighter materials to make cells will be the key.
4. The scale of wind energy business is expanding fast such that it is approaching the size of GE’s gas and turbine business. This has motivated GE to go further than splicing different technologies, such as propulsion equipment developed for ships and standard variable-speed drives used in pumps and conveyer belts, to designing equipments specifically for wind.
5. The shortage of silicon has one positive effect in that it has accelerated investments in thin film technologies that use much less silicone. Two of the most advanced thin-film companies are Miasole and Nanosolar, with investments by John Doerr in the first and Larry Page and Sergey Brin in the second.
6. Politics has an important role in the future of renewable energy. The rise of carbon price and subsidies is a good sign. The political developments are expected to impact nuclear power the most (as compared to wind and solar) as the carbon-free technology.

The Economist, June 2^nd 2007. (“Sunlit Uplands” pp. 16-20)