THE PURSUIT OF ENERGY SECURITY CONSISTENT

The Pursuit of Energy Security consistent with the Pursuit of Carbon Emission Reductions

The Pursuit of Energy Security consistent with the Pursuit of Carbon Emission Reductions

Introduction

The realization that emissions are responsible for an impending climate crisis has set in motion a major change in human history—the evolution to a carbon-free economy. Few people realize the extent to which this will alter everything that currently makes up our daily lives. Having been born into a world dominated by fossil fuels, we lack a reference for this transformation, but we are starting to acknowledge that it must happen if we are to preserve the earth for future generations.

The Pursuit of Energy Security consistent with the Pursuit of Carbon Emission Reductions

One of the challenges ahead is the development of tools to better measure the true environmental value of greenhouse gas (GHG) abatement programs, and the use of these tools to determine the relative impact of our options for carbon reduction versus carbon sequestration. We need to improve our ability to identify and invest in projects that will give the best environmental returns for our limited resources.

Dave Douglas, (Adam, 2005) vice president of Eco Responsibility at Sun Microsystems, suggests using a carbon Net Present Value (NPV) to better understand the relative environmental benefits of different offset programs. Whereas a standard NPV defines the economic value of the life of a program, a carbon NPV—or better yet an environmental NPV (eNPV)—would yield the environmental benefits of a program's emission reductions over time.

The discount factor for the time value of carbon could be based on the timelines for emissions reductions put forth by the Intergovernmental Panel on Climate Change and the Stern Review. Both sources highlight the need to scale back emissions in the next 30 to 40 years if we are to avoid long-term and potentially irreversible damage to the earth and its inhabitants. Abatement of a ton of GHG before 2050 is clearly worth more than a post-2050 ton. An eNPV would account for this difference when evaluating the relative merits of competing projects.

Furthermore, an eNPV can be taken in conjunction with a traditional NPV to provide a more comprehensive view. Compounding environmental and financial metrics would create derivatives that better account for the time sensitivity of carbon reduction. This could serve as the basis for more sophisticated modeling techniques that factor in the forecasted GDP impact of not averting the crisis. These figures can be significant—the Stern report estimates failure to act could result in a loss of as much as 20 percent of global GDP.

Two other factors that come into play with an eNPV analysis are the rate of carbon reduction or sequestration, and the life of each program. These factors are important when comparing renewable energy, afforestation, and carbon storage initiatives.

Once a clean-energy project is brought online, it immediately delivers carbon reductions at an approximate rate of 1 metric ton (megaton) of carbon dioxide equivalent (CO2e) per MWh, using coal-fired plants as a ...