Reviewing the Results of Carbon Market Forecasting

1. Reviewing the Results of Carbon Market Forecasting Dr. Mark C. Trexler Director, EcoSecurities Consulting Limited January 6, 2020

2. Table of Contents

4. Introduction and Overview • EcoSecurities developed a series of reports for NWPCC in an effort to provide NWPCC with tools and information for evaluating the value of carbon as it relates to future grid capacity planning purposes in the northwest. • Specifically, we focused on: • Carbon Capture and Storage Data for the Pacific Northwest • GHG Mitigation Supply Curves • Carbon Price Forecasting – Literature Review • Conceptualizing Several Carbon Market Scenarios

6. The Role of Carbon Market Forecasting • Key to public and corporate policy and strategy development • Forecasting the future value of carbon in a carbon-constrained world is usually done through GHG price forecasting models that use a carbon tax proxy to forecast carbon prices even in a cap-and-trade scenario. • In reality, carbon markets and market-clearing prices will be profoundly dependent on the details of the policy scenario that is being implemented, since these details will largely determine both the demand for emissions reductions, and the shape of the emissions reduction supply curve. • Absent in-depth scenario development, a relatively high-level look at GHG markets is likely to generate the most useful insight for NWPCC into the economic implications of future carbon constraints.

8. Overview of Credit Price Projections • Deliver insight into how CO2 liability costs may evolve in a carbon-constrained world, so as to assist NWPCC in incorporating potential future CO2 liabilities into its planning process for the power system in the Pacific Northwest. • Literature review of publicly available model results aimed at highlighting the key attributes of a variety of GHG price forecasting approaches. • Top-down models • Bottom-up models  • “By analogy” forecasting  • “Historical extrapolation” forecasting   • “Expert surveys”

9. Overview of Credit Price Projections • The highest price projection found in the literature review suggested a carbon price of $257/ton CO2 would be needed by 2025 to accomplish the emissions reduction objectives to reduce emissions to 71% below the 2005 level by 2050 (Lieberman-Warner; 14% cap met with offsets). • The lower price projections found in our literature review estimated that a carbon price between $0.41 and $0.30/ton CO2 would be needed by 2020 to 2025 to accomplish the emissions reduction objectives of reaching radiative forcing targets of 750ppm in the year 2100. • The range of projections illustrates the challenges of evaluating price estimates without understanding 1) the details of the scenario being modeled, and 2) the details of the modeling process itself. • The highest price projection found in the literature review suggested a carbon price of $257/ton CO2 would be needed by 2025 to accomplish the emissions reduction objectives to reduce emissions to 71% below the 2005 level by 2050 (Lieberman-Warner; 14% cap met with offsets). • The lower price projections found in our literature review estimated that a carbon price between $0.41 and $0.30/ton CO2 would be needed by 2020 to 2025 to accomplish the emissions reduction objectives of reaching radiative forcing targets of 750ppm in the year 2100. • The range of projections illustrates the challenges of evaluating price estimates without understanding 1) the details of the scenario being modeled, and 2) the details of the modeling process itself.

11. Understanding Future GHG Supply and Demand Variables: Demand • State, Regional, or Country Participation in the Trading Regime • The Political Issuance of Free Allowances • Economic Growth as a Contributor to GHG Market Demand • Energy Prices • Technology Evolution and Deployment • How National Forest Sinks are Accounted For • The Likelihood of Government Compliance with Targets • All of these factors and more go into estimating demand when thinking about carbon market clearing prices

12. Understanding Future GHG Supply and Demand Variables: Supply • Rules Governing Market Mechanisms • How A Reduction is Defined (including additionality) • Technical and Implementation Barriers • Technology Development and Deployment • Project Economics • The Cost of Electricity and Fossil Fuels • The Availability of GHG Project Financing • Market Psychology and Expectations • All of these factors and more contribute to defining supply curves

14. Developing Relevant Supply Curves Mitigation supply data organized in multiple ways: • Geography (Moderate Additionality) • WCI • US • Global • Additionality Sensitivity Cases • WCI • US • Global • Cap and Trade Supply Cases • WCI Capped Sectors and Eligible Offsets • US Capped Sectors and Eligible Offsets • Individual Mitigation Sector Supply Curves • Methane • Forestry and Agriculture • Global Electric Sector • High GWP Gases • Transport Sector • Industrial Sectors

15. Supply Curves for the Year 2012: • The WCI is targeting reductions to 15% below 2005 levels by 2020; this amounts to approximately 125 million tons of reductions from a business as usual baseline in 2020. • WCI Region Supply Curves • Reference case: 150 million tons of reductions available before costs escalate • Low Additionality Case: Almost 250 million tons • High Additionality: 50 million tons • A target of a 15% reduction in U.S. emissions from 2005 levels, or a return to 1990 emissions by 2030, each requires approximately 2.3 billion tons of reductions. • U.S. Region Supply Curves • Reference Case: 500 million tons • Low Additionality: Almost 850 million tons • High Additionality: 160 million tons ; 115 million of these tons are available at a cost of less than $20 per ton

16. Supply Curves for the WCI Region…

17. Reference Case Supply Curve Supply Curves for the WCI Region…

18. Low Additionality Stringency Supply Curves for the WCI Region…

19. High Additionality Stringency Supply Curves for the WCI Region…

20. Supply Curves for the U.S. Region…

21. Reference Case Supply Curves for the U.S. Region…

22. Low Additionality Stringency Supply Curves for the U.S. Region…

23. High Additionality Stringency Supply Curves for the U.S. Region…

24. WCI Cap and Trade Scenario…(using moderate additionality screens)

25. Supply Curve WCI Cap and Trade Scenario…

26. WCI Region Offsets WCI Cap and Trade Scenario…

27. US Region Offsets WCI Cap and Trade Scenario…

28. Global Offsets WCI Cap and Trade Scenario…

29. Methane Sector Supply(moderate additionality screen)

30. WCI Methane Sector Supply…

31. U.S. Methane Sector Supply…

32. Global Methane Sector Supply…

33. Forestry Sector Supply(moderate additionality screen)

34. WCI Forestry Sector Supply…

35. U.S. Forestry Sector Supply…

36. Global Forestry Sector Supply…

37. Carbon Capture and Storage • There is significant technical potential to store CO2 in the Pacific Northwest • The region is unlikely to significantly influence either the pace of public policy around emissions mandates, or the pace of technology development around CCS

38. Carbon Capture and Storage Technologies

39. Carbon Capture and Storage Potential

41. Putting it All Together • Baseline Development and Associated GHG Emissions • Emissions Reduction Targets, Timeframe, and Geographic Scope • Covered Gases and Sectors • Carbon Tax vs. Cap and Trade • Emissions Trading Rules, Including Access to Carbon Offsets • Technology Advancement Rates and Associated Mitigation Costs

43. Considering the Future of Policy • 3 Basic Scenarios: • “Regional Initiatives Dominate” (Pessimistic) Scenario • “1990 Emissions by 2030” (Base Case) Scenario • “Atmospheric Stabilization” (Optimistic) Scenario

44. Regional Initiatives Dominate • Implied Magnitude of Reductions: WCI targets reduced emissions to 15% below 2005 levels by 2020; amounts to approximately 125 million tons of reductions from a business as usual baseline in 2020.   • Key Variables in Projecting Carbon Prices: Political acceptability of carbon prices; Wouldn’t be politically acceptable for WCI ratepayers and residents to be paying a high price for carbon.  • Price Forecast: $10-20/ton CO2 in 2020-2030 time frame; Does not assume any changes in policy measures being implemented which would lead to significant changes in the price forecast between 2020 and 2030.

45. 1990 Emissions by 2030 • Implied Magnitude of Reductions: National BAU baseline suggests 2030 emissions of 8.5 billion tons. A target of a 15% reduction from 2005 emissions, or a return to 1990 emissions by 2030, each requires approximately 2.3 billion tons of reductions. • Key Variables in Projecting Carbon Prices: Supply and demand are key variables in establishing a market clearing price for GHG emissions reductions; offsets would deliver up to half of the necessary reductions. • Price Forecast: $20-50/ton CO2 in the 2020 to 2030 timeframe. Depending on how the mandates are implemented the price could rise early and level out, or climb over time.

46. Atmospheric Stabilization • Implied Magnitude of Reductions: Global BAU baseline suggests emissions in 2100 of as much as 100 billion tons. Stabilizing atmospheric concentrations of GHGs in the atmosphere might require a 90% reduction from the business as usual baseline. • Key Variables in Projecting Carbon Prices: Assumes a large-scale transformation in the world’s use of energy. The earlier a price signal is imposed, the easier it should be to achieve the ultimate targets; There will always be political pressure to start with a low price signal.  • Price Forecast: $30/ton CO2 in 2020 as a reasonable step towards stabilization, with that price ratcheting up to $50/ton in 2030.

47. Discussion…