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<title>April 2007: Kermitology</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p align="left"><b><u><br>
</u></b><u><b>April 2007</b></u></p>
<p align="center"><font size="6"><b>Kermitology</b></font></p>
<p><strong>by Roger Feldman --
</strong><b>Andrews Kurth, LLP</b><strong><br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2008/01/05</em>)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
<p class="MsoBodyText" align="left" style="text-align: left; line-height: 200%; margin-bottom: .0001pt"> </p>
<p class="MsoBodyText" align="left" style="text-align: left; margin-top: 0; margin-bottom: 0">
That the tipping point in national belief in global warming’s existence has
occurred is not news. What it means for different facets of the energy
business -- notably renewable energy -- is actually more problematic than it
may seem. <u>Time</u> recently published a list of 51 things its readers
could do to “make a difference” with respect to global warming. Some items
on the list would warm an energy merchant’s heart: “Buy Green Power, at
Home or Away.” Some were pseudo-policy pronouncements: “Pay the Carbon Tax”
-- you may not know we had one but, <u>Time</u> assured us, it’s better
than the “cap & trade” schemes Congress and California are pursuing. And
other suggestions empowered us all to make a statement, without mercy to
non-energy merchants (“Remove the Tie”), and enhancing -- if not entrancing
--others (“Wear Green Eye Shadow.”).</p>
<p class="MsoBodyText" align="left" style="text-align: left; margin-top: 0; margin-bottom: 0">
<br>
Everyone has joined in the denunciation of global warming. There’s a
simple reason. As the spokesman for the Alliance of Auto-Manufacturers put
it: “If you’re not at the carbon negotiating table, you’re on the menu.”
True. But, I would warn energy entrepreneurs, if you’re not on the <u>green</u>
menu, you’re not at the table (to earn traditional green -- or Euro currency
colors.) It’s well and good for renewables advocates to “prove”
analytically that by 2025 renewable energy <u>could</u> provide more than
the US needs for new power capacity, and by 2030 could supply 30-40% of US
petroleum products. The reality of renewables usage will be materially
affected by how carbon-minimizers evaluate their contribution to abatement
and adaptation.</p>
<p class="MsoBodyText" align="left" style="text-align: left; margin-top: 0; margin-bottom: 0"> </p>
<p class="MsoBodyText" align="left" style="text-align: left; margin-top: 0; margin-bottom: 0">
The increasingly Commonly Accepted Wisdom among the carbonoscenti is that to
stabilize carbon emissions, seven different categories of reduction
techniques will be used -- not a single magic bullet. Renewables is one of
these “wedges.” So too -- and in many cases immediately more effective --
is reduction of energy use. More perceptibly direct is powerplant pollution
control, and right up there (as EDF has now recognized) is nuclear power.
Nuclear is by far the largest single source component of carbon reductions
achieved by US voluntary programs. And out at the technological margins the
higher tech direct carbon solutions like IGCC full commercialization and CO<sub>2</sub>
storage are the long term solutions looked to as the consequences of cap and
trade. </p>
<p class="MsoBodyText" align="left" style="text-align: left; margin-top: 0; margin-bottom: 0"> </p>
<p class="MsoBodyText" align="left" style="text-align: left; margin-top: 0; margin-bottom: 0">
So to understand, know the comparative “value” of the renewable energy
resource merchant’s product, it is necessary to view the world through green
eyeshades, green eyeshadow, and green currencies: those firms needing or
perceiving the future need to have a legal compliance or a social PR; Kermitologists
reflecting the general public’s increasing angst at pictures of stranded
penguins, dried up riverbeds, and prospects of flooded coastal plains; and
financial commodity traders who see carbon futures trading as the greatest
thing since tulipmania. </p>
<p class="MsoBodyText" align="left" style="text-align: left; margin-top: 0; margin-bottom: 0">
<br>
But what does it mean to purveyors of renewable energy solutions?</p>
<p class="MsoBodyText" align="left" style="text-align: left; text-indent: .5in; margin-top: 0; margin-bottom: 0">
<span style="font-family: Symbol"><br>
�<span style="font:7.0pt "Times New Roman"">
</span></span>First, the need to grapple with no new metrics of social
utility: demonstration of mitigation through the actual avoidance of
emissions from fossil fuel sources which otherwise would have occurred.
Evaluation of the net carbon balances of their physical production;
competitive assessment of carbon displacement profiles with competing
energy sources. The comparative measurement and explicit and implicit
monetary valuation given by government based on the metrics is critical to
the renewable industry. It is principally the life time system merits of
improving renewables from carbon displacement perspective are legally
recognized by governments that they will thrive.
<span style="font-family: Symbol"><br>
<br>
�<span style="font:7.0pt "Times New Roman"">
</span></span> Second, recognition that the Renewable Energy Credits
programs of individual states are <u>not</u> today a vehicle for the
denomination and trading of carbon rights. The price assigned to RECs in
effect includes limited implicit value, and no explicit value, for carbon
mitigation potential of renewable green energy purchases. Only now is a
modest first stab at modifying this situation being undertaken by a joint
working group made up of American Bar Association/Emissions Market
Association/American Council on Renewable Energy members. Some rigorous
carbonomicists simply view RECs (like European feeder tariffs) as a special
interest diversion from the GHG-reduction crusade, or a second order of
merit type of market.<br>
<br>
Whether renewable energy will be given explicit value in a future US GHG cap
and trade system is of course, still problematic. Perhaps renewables will
be afforded some type of set-aside or special valuation in the system. But
the form that will take, and what proof of carbon displacement additionally
will be required to prove the renewables’ “value,” remains to be seen.</p>
<p class="MsoBodyText" align="left" style="text-align: left; margin-top: 0; margin-bottom: 0"> </p>
<p class="MsoBodyText" align="left" style="text-align: left; margin-top: 0; margin-bottom: 0">
Certainly the current European scheme, the basic EU ETS which is presently
in place, relegates the promotion and growth of renewables to the realm of
special side effects motivated by the individual policies of member states.
The CDM and JI initiatives for the creation of offset carbon credits which
may be used in the EU ETS system are project-specific in nature. They are
not limited to renewables, and in fact, from a cost-effectiveness
standpoint, near-term may best be served by various industrial gas
reduction projects which offer lower capital delivery costs, with less
reliance on project finance. By contrast, repowering medium hydro, wind, or
biomass cogeneration take longer to complete, present higher risk, and may
present measurement issues. There is an absence of long-term perspective
enshrined in the system. </p>
<p class="MsoBodyText" align="left" style="text-align: left; margin-top: 0; margin-bottom: 0">
<br>
So the amount of renewable green energy on the national carbon reduction
menu remains to emerge as a consequence of the actual shape of longer term
legislation and regulation, the effectiveness of competing technologies in
the US, abroad, and to the extent they can be interfaced. Renewables
clearly not being served as dessert at the GHG Earth Day party, even though
<u>Time’s</u> recommendation #28, complete with appropriate cake
illustration, is: “Have a Green Wedding.” Serious evaluation is required of
the following three basic questions: </p>
<p class="MsoBodyText" align="left" style="text-align: left; text-indent: -.5in; margin-top: 0; margin-bottom: 0">
(1)<span style="font:7.0pt "Times New Roman""> <br>
</span>What role do renewables play in the GHG/Carbon Reduction and related
Offset Schemes presently in place in the world?</p>
<p class="MsoBodyText" align="left" style="text-align: left; text-indent: -.5in; margin-top: 0; margin-bottom: 0">
(2)<span style="font:7.0pt "Times New Roman""> <br>
</span>What form should the US GHG markets take relative to the present
European GHG/Carbon Reduction Scheme so that renewables play an optimum
role?</p>
<p class="MsoBodyText" align="left" style="text-align: left; text-indent: -.5in; margin-top: 0; margin-bottom: 0">
(3)<span style="font:7.0pt "Times New Roman""> <br>
</span>What public policy incentive programs and regulatory formulations
would make renewable energy most pertinent to GHG/Carbon reduction programs
on a sustainable basis?</p>
<p align="left" style="margin-top: 0; margin-bottom: 0">
<span style="font-size: 12.0pt">This word of Kermitological advice is
offered: It’s harder to be a renewable green merchant then you think in the
new GHG world. It is up to the industry to better identify its niche and
make sure it continues to occupy it in the GHG world.</span></p>
<p align="left" style="margin-top: 0; margin-bottom: 0"><br>
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<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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