Measuring and managing climate change impacts through financial reporting

carney bloomberg photo

Photo courtesy of Task Force on Climate-related Financial Disclosures

Bank of England Governor Mark Carney and task force chairman Michael Bloomberg at the Task Force on Climate-Related Financial Disclosures recommendations report launch.

Most large companies recognize the risks climate change poses to their facilities, operations, and supply and distribution chains. And many of these companies are letting their stakeholders know how climate risks and opportunities will affect their bottom line.

Currently, much of this information is made public through voluntary reporting to non-profit organizations, in corporate sustainability reports, and, for publicly-traded companies, filings with the Securities and Exchange Commission. In our research on company strategies to manage climate risks and opportunities, we have found that the quality of reporting and level of detail varies extensively from company to company, and sector to sector.

Reflecting the growing importance of climate change as a material set of risks for companies to manage, finance ministers from 20 major economies asked the Financial Stability Board (FSB) to review the financial implications of climate change. The G-20 Finance Ministers established the FSB after the 2008 financial crisis to monitor and make recommendations on the global financial system. The FSB convened an industry-led task force  to develop voluntary recommendations to better, and more consistently, integrate into financial filings the risks and opportunities posed by physical climate impacts and the transition to a lower carbon economy. 

In a speech, “The Tragedy of the Horizon,” describing the impetus for creating the FSB task force, Bank of England Governor Mark Carney said: “We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix.”

In December 2016, the task force, chaired by Michael Bloomberg, released recommendations focused on four areas of climate-related financial disclosure:  governance, strategy, risk management, and metrics and targets. 

C2ES commends the task force on its efforts to shine a light on the risks we are already facing from climate change, and to enhance the transparency we need to better understand and address them over the long term. 

In our comments submitted on the recommendations, we suggested that the task force:

  • Provide additional guidance on the timeframes companies would use for conducting scenario analysis of their business models and portfolios. For example, if a company is reviewing an investment with a short time horizon, a scenario running out to 2050 or longer might not be helpful.
  • Provide additional guidance for companies on how to select the appropriate scenario tools to assess climate risks.
  • Provide additional guidance on how mainstream financial filings can interact with corporate sustainability reports in a consistent way given that financial data and sustainability data have different levels of precision and timelines.
  • Consider how implementation of the recommendations could involve a “maturity model” that would allow companies to self-assess their progress, benchmark against peers, and influence executive decision-making. An example of this type of model is the Electric Power Research Institute’s Electric Power Sustainability Maturity Model.
  • Provide additional implementation guidance for sectors that the recommendations currently do not reference specifically, such as for information technology, telecommunications, health care, consumer products, and professional services.  Translating climate risks and opportunities into material financial impacts on income statements and balance sheets requires sector-specific guidance. As a starting point, the recommendations provide sector-specific guidance for sectors with high greenhouse gas emissions and energy and water use. Climate-related financial disclosures will be more helpful if they are adopted economy-wide so additional sector-specific guidance may be useful.
  • Engage with stakeholders to identify ways to promote consistency across voluntary reporting regimes to reduce the burden on data preparers.

Many companies will be interested in demonstrating to investors and stakeholders that they are reviewing their corporate sustainability reports and environmental, social, and governance disclosures in line with the task force’s recommendations. An iterative process for enhancing climate-related financial disclosure will likely be needed to make this possible.

We believe the task force recommendations will help ensure that companies take a long view and avoid the “tragedy of the horizon.”

 

How about using that captured carbon?

carbon shoes

These "shoes without a footprint" were made from carbon that was captured from power production.

Photo courtesy NRG

Imagine if the carbon dioxide (CO2) that emerges from smokestacks at coal- and natural gas-fired power plants and steel and cement facilities could actually be used for something.

Some innovators are imagining just that.

For even more creative ideas, just look at the semi-finalists for the $20 million NRG COSIA Carbon X Prize.

Research teams from around the world submitted ideas for using CO2 in building materials, paint, fertilizers, plastics, and even toothpaste. Other ideas include CO2-based fuels and carbon nanotubes that could be used to make environmentally sustainable lithium-ion and sodium-ion batteries. The prize will be awarded in 2020 after the top ideas are tested in real-world conditions.

Carbon dioxide from burning fossil fuels is contributing to a changing climate that is bringing more frequent and intense heat waves, downpours, and drought and rising sea levels. Capturing CO2 from power plants and industrial sources will help reduce these harmful emissions.

In the U.S., we have been capturing CO2 from manmade sources such as commercial-scale natural gas processing plants since the early 1970s. We can offset the costs of capturing and storing carbon dioxide and increase the number of carbon capture projects if we put the CO2 to work.

One way this is already being done is with carbon dioxide enhanced oil recovery (CO2-EOR), where pressurized CO2 is pumped into already developed oil fields to get out more of the oil. CO2-EOR boosts domestic energy production, makes use of already developed oil fields, and stores carbon dioxide underground.

C2ES co-convenes a coalition of industry, labor, and environmental groups encouraging greater deployment of carbon capture technology for CO2-EOR. There’s bipartisan support for incentivizing technologies to capture carbon dioxide from manmade sources and put it to use in marketable ways.

The U.S. produces 300,000 barrels per day, or nearly 3.5 percent of our annual domestic oil production, through CO2-EOR. But we’re mostly using CO2 that isn’t from manmade sources.

For every barrel of oil produced using manmade CO2, there is a net CO2 storage of 0.19 metric tons even considering the emissions from the oil, according to the International Energy Agency and Clean Air Task Force. In other words, EOR using power plant CO2 results in a 63 percent net reduction of the total injected volume of CO2 or a 37 percent reduction in the life cycle emissions from oil.

At the end of 2016, NRG completed construction on Petra Nova, the first American retrofit of a coal-fired power plant to capture CO2 emissions, which are then used for EOR. The Texas project was on schedule and on budget. It’s capturing more than 90 percent of the CO2 from a 240 MW slipstream of flue gas from an existing coal unit at the WA Parish plant. It’s now the largest project of its kind in the world.

Finding more ways to turn carbon dioxide from an energy and industrial sector waste product to a useful commodity could spur the development of new technologies and products while limiting climate-altering pollutants. There’s promise, but also scientific, regulatory, and market challenges.

The Global CO2 Initiative, which advocates a mix of policy, research funding, collaboration, and infrastructure improvements to accelerate commercial deployment, estimates that the size of the global CO2 non-EOR utilization market could be as large as $700 billion by 2030. Aside from EOR, we could be using 7 billion metric tons of CO2 per year for fuels, concrete, polymers and more. That’s about 15 percent of current global CO2 emissions.

The new administration and new Congress need to consider how best to incentivize continued research, development, and commercial-scale application of CO2 utilization. With the right policy incentives, the U.S. can take a leadership role in this vital technology.

How the first US offshore wind project holds lessons for carbon capture

Top: Siemens 2.3 MW Offshore Wind Turbines, courtesy Siemens Press.

Bottom: The ADA-ES 1 MWe pilot unit, courtesy US Department of Energy.

This fall, America’s first offshore wind farm will come online off the coast of Rhode Island, launching a new industry with the potential to create clean energy jobs in manufacturing and in the marine trades, attract private investment to New England, and reduce carbon emissions.

In Europe, the number of offshore wind farms grew from zero to 84 in just a few decades. What lessons can we draw from the growth of offshore wind that could help advance carbon capture technology?

State Leadership

New energy technologies often need both state and federal support to be deployed commercially. Rhode Island has been a leader in supporting offshore wind. In 2010, its legislature authorized a state utility to enter into an offtake agreement for offshore wind power. This year, Massachusetts did the same, and New York announced a new Offshore Wind blueprint.

Rhode Island also brought stakeholders together to create an Oceanic Special Area Management Plan outlining multiple uses for the marine environment. These efforts laid the groundwork for Deepwater Wind to develop the Block Island Wind Farm, a 30 MW, five-turbine project that can provide power for most of Block Island’s 1,051 residents.

Similar state policies could help deploy more carbon capture technology as well. A handful of states have clean energy standards that include carbon capture technology, including Illinois, Massachusetts, Michigan, Ohio and Utah. This year, Montana Gov. Steve Bullock highlighted carbon capture in his state’s Energy Future Blueprint. Other states could follow this model.

Both the Western Governors’ Association and the Southern States Energy Board have issued resolutions supporting carbon capture technology as did the National Association of Regulatory Utility Commissioners

Financing Support

National policies and early financing support played a role in the success of offshore wind projects in Europe. A report by the Global Carbon Capture and Storage Institute noted that European nations included offshore wind in national energy policies and established feed-in tariffs to provide incentives for deployment.

Multilateral development banks like the European Investment Bank played a leadership role by lending to early offshore wind projects, paving the way for commercial banks to follow. Once these major factors were in place, then technology development, the establishment of standardized contract structures, and maintaining a certain level of deal flow helped drive efficiencies that brought down costs.

When it comes to financing carbon capture, use and storage (CCUS) in the U.S., we have some pieces of the puzzle in place. There is already a basic federal and state regulatory framework for underground storage of CO2, for example.

Still, financing policies are needed to enable investment in carbon capture projects. We should extend and expand commercial deployment incentives like tax credits and open up the use of master limited partnerships and private activity bonds to carbon capture, among other things.     

Regional Approach

A third lesson to draw from offshore wind is that to create new domestic industries, it helps to take a regional approach. Last year, the U.S. Department of Energy (DOE) announced funding for a multi-state effort for offshore wind in the Northeast to develop a regional supply chain.  

DOE is taking a similar approach with CCUS and launched seven Regional Carbon Sequestration Partnerships to characterize CO2 storage potential in the U.S. and to conduct small and large-scale CO2 storage injection tests. Millions of tons of CO2 have already been stored for decades in West Texas as part of enhanced oil recovery operations. The regional partnerships characterized the potential for more CO2 storage in deep oil-, gas-, coal-, and saline-bearing formations as illustrated in the Carbon Storage Atlas. To date, the partnerships have safely and permanently injected more than 10 million metric tons of CO2 in these types of formations.    

Investing seriously in carbon capture technology has economic benefits including for electrical workers, boilermakers, the building trades, and steelworkers. A new CO2 commodity industry could be created to reuse CO2 to make other products.

Carbon capture also has environmental benefits, helping us address emissions from industrial plants, which are the source of 21 percent of U.S. greenhouse gas emissions, and from coal and natural gas power plants, which currently supply two-thirds of U.S. electricity.

This fall, as we celebrate the beginning of the new offshore wind industry in the U.S., let’s keep thinking big about what is possible with carbon capture technology. With sufficient financial and policy support, we can create skilled jobs, attract private investment, and lower CO2 emissions.  

Putting carbon capture technology in context

 

Photos by Dennis Schroeder / NREL, Iberdrola Renewables, Inc., U.S. Department of Energy

Wind and solar power were once considered expensive and were not widely deployed. Today, skeptics say the same about technology to capture, use and store carbon dioxide emissions (CCUS or carbon capture).

So what lessons can we draw from the experience of the wind and solar industries as they’ve become more mainstream to facilitate a faster and broader deployment of carbon capture technology?

Wind Energy

The cost of wind energy has declined by more than 60 percent since 2009 and average nameplate capacity increased 180 percent between 1998-99 to 2015. These improvements have led to an installed wind capacity of 74,821 MW in the United States, enough electricity to power nearly 20 million average U.S. homes every year.  

These wind energy milestones in cost reduction, performance improvements, and scale of deployment were supported by the Production Tax Credit (PTC), a federal deployment incentive. It’s reasonable to assume that the PTC would have been even more successful if it had been maintained consistently instead of experiencing periods of uncertainty regarding its fate, leading to boom-and-bust wind power development cycles.

Ongoing federal research and development (R&D) also spurred improved wind industry technology. For example, in 2007, the National Renewable Energy Laboratory initiated the Gearbox Reliability Collaborative in response to industry-wide technology challenges. That research led to improved gearbox designs, reducing the overall cost of wind energy and showing how collaborative industry efforts and federal support for R&D can resolve performance challenges.  

Solar Energy

Solar photovoltaic (PV) technologies experienced similar dramatic cost declines due to economies of scale and improved manufacturing and performance. The cost of utility-scale solar has fallen more than 54 percent since 2011. The efficiency of all PV cells steadily improved between 1975 and 2010, supported by multi-decade R&D programs like the Department of Energy’s Thin Film PV Partnership.

These cost declines and performance improvements were facilitated by the Investment Tax Credit, another federal deployment-focused incentive, and the Section 1603 Treasury program, a federal loan guarantee mechanism to support project financing. Strong state policies like the California Renewables Portfolio Standard enabled developers to enter into above-market power purchase agreements. The experience of utility-scale solar PV demonstrates that overlapping policies are essential to achieve financing for first-of-a-kind projects.

Lessons for carbon capture

We can draw three key conclusions from wind and solar energy’s experience:

  • Stable, long-term deployment incentives that build on previous public and private investments in technology research, development and demonstration (RD&D) are essential to facilitate a large volume of projects;
  • As more projects are deployed, costs are reduced through economies of scale, learning from experience, and technological innovation;
  • Ongoing government support for RD&D can deliver cost reductions by supporting innovation and overcoming performance challenges.

In contrast to wind and solar, the U.S. lacks an effective federal incentive for commercial deployment of CCUS—despite being a world leader in public and private RD&D for early stage technology demonstration. Fifteen commercial-scale CCUS projects are operating globally; eight of those are in the United States. But that’s not nearly enough to meet our mid-century climate goals.

Carbon capture can be used at coal- or natural gas-fired power plants, which are baseload generation resources. It’s also the only way to reduce carbon emissions from some industrial plants, such as facilities producing chemicals, steel, and cement.  Also, over the long-term, we’ll need to integrate biomass energy systems with carbon capture (BECCS). Combining the capture of photosynthetic carbon from biomass with CCUS can enable negative emissions.

While first-of-a-kind, commercial-scale CCUS projects are expensive, we know that as more projects come online, they will become cheaper. SaskPower estimates it could cut costs by up to 30 percent on the next unit to be retrofitted following its current experience operating the world’s first commercial-scale, coal-fired power plant carbon capture project. Developers are exploring novel approaches, including the Exxon and Fuel Cell Energy partnership and the Exelon-supported NET Power project, that have the potential to reduce costs still further. 

It’s essential to extend and expand tax incentives for carbon capture, update state laws to include CCUS technology in clean energy standards, and fund continued carbon capture  RD&D, among other things, if we are going to reach our emissions-cutting goals. 

 

Exciting year for carbon capture technology

This year we will witness a number of milestones in technology to capture, use and store carbon dioxide from industrial sources and power plants – technology we need to reach our goals to reduce greenhouse gas emissions. We will need continued policy and financing support, however, to accelerate deployment worldwide. Innovative research in finding uses for captured carbon will also be essential.   

In 2016, the Emirates Steel Industries project in Abu Dhabi will be the world’s first steel plant with carbon capture, use and sequestration (CCUS) technology to begin operations. Globally, seven commercial-scale CCUS projects are under construction and many more are in the planning stages.

In the U.S., two notable CCUS projects are expected to come online soon, including the first-ever incorporation of CCUS technology at a bioethanol refinery at the Archer Daniels Midland project in Illinois and the incorporation of CCUS technology at the coal-fired power plant at the Southern Company Kemper project in Mississippi. Not far behind, in 2017, the NRG Energy Petra Nova project in Texas will also incorporate CCUS technology on coal-fired power generation.    

These anticipated project developments reflect the fact that CCUS technology is advancing around the world. Fifteen commercial-scale CCUS projects are operating. Eight of those are in the United States, which has been a leader in this area.

Recent North American milestones include the retrofit of the SaskPower Boundary Dam coal-fired power plant project in Canada with CCUS technology in 2014. In April 2016, the company announced it had exceeded the carbon capture reliability goals established for the technology. SaskPower estimates it could cut costs up to 30 percent on future units based on the experience it has acquired. Also in Canada, in November 2015, Shell incorporated CCUS technology on hydrogen production at the Quest project in Alberta. 

CCUS technology grows increasingly important as nations begin to implement their emission reduction pledges under the Paris Agreement. The Intergovernmental Panel on Climate Change Fifth Assessment Synthesis Report concluded that CCUS technology will be essential to meet mid-century climate goals of keeping global temperature rise within 2 degrees Celsius of preindustrial levels. In fact, without CCUS, mitigation costs will rise by 138 percent.

Even as nations take on climate change and diversify their energy portfolios, fossil fuels are expected to serve 78 percent of the world’s energy demand in 2040. The most recent Energy Information Administration analysis suggests that global energy consumption is expected to rise by 48 percent over the next 30 years led by significant increases in the developing world. In Asia in particular, power generation from fossil fuels is expected to continue to grow over the near term.

Earlier this spring, the International Energy Agency (IEA) published a study on retrofitting China’s coal-fired power plants with CCUS technology, which will be critical because China has roughly 900 GW of installed coal-fired power plant capacity and has committed to peaking its CO2 emissions by 2030. The IEA study concludes that one-third of the coal fleet in China is suitable for retrofitting with CCUS technology.

Aside from the power sector, CCUS is a critical technology for the industrial sector, which contributes roughly 25 percent of global emissions. Carbon dioxide (CO2) is a by-product of many manufacturing processes for chemicals, steel, and cement production as well as refining. There are no practical alternatives to CCUS for achieving deep emissions reduction in the industrial sector.

In some cases, the cost of incorporating CCUS technology into industrial processes may be lower than in the power sector because the CO2 stream in the industrial sector is often relatively pure, i.e. less mixed with other gases. A number of industrial CCUS projects are already operational including the Uthmaniyah natural gas processing project in Saudi Arabia that came online in 2015. In the U.S., the Air Products Port Arthur project in Texas incorporating CCUS technology on hydrogen production has been operational since 2013.

As new projects begin operating around the world, the Global CCS Institute concluded that policymakers can learn lessons for CCUS from the development of offshore wind in Europe. Those projects benefited from policy support from national governments through feed-in tariffs and long-term offshore wind capacity targets in national energy plans. The report also concludes that a multi-source approach to finance, including project finance, export credit agency support, multilateral institution lending, and green bank funding, will be helpful for CCUS technology. 

Finding uses for the captured carbon will also be essential. At the January World Economic Forum meeting in Davos, Switzerland, the Global CO2 Initiative was launched to develop innovative approaches to transform CO2 into commercial products. Promising options include construction materials, plastics, chemicals, and agricultural products. 

As researchers continue exploring new uses for captured carbon, CCUS project developments this year and next continue to highlight the significant potential for CCUS technology to contribute to global emissions reduction.

This blog post first appeared in the Summer 2016 edition of The Current, a publication of the Women's Council for Energy and the Environment.