the work is Environmental Accounting and Finance, this project is about Carbon Markets / Emissions Trading Problem 1. Acid Rain: The Southern Company (A) The case introduces a framework for the analysis that supports managerial decisions on how to comply with emissions reductions regulation, in this case the 1990 Clean Air Act amendments. 1.1.The company has several options available for complying with the new law. The cost of these options is derived either from investments required to reduce emissions internally in the company, or from purchasing allowances. Two options were studied in class. Estimate the cost of pursuing the following additional options: A. The company installs scrubbers in 2000. B. The company switches to low-sulfur coal in 1996. C. The company switches to low-sulfur coal in 2000 (Phase II). D. The company switches to low-sulfur coal in 1996, and installs scrubbers in 2000. E. The company switches to low-sulfur coal in 2000, and installs scrubbers in 2000. 1.2. Based on the cost of implementing each option, what should the company do? Problem 2. Describe the climate change policies followed by each of these companies: A. NRG Energy (NYS: NRG); Website: www.nrgenergy.com B. Baxter International (NYS: BAX); Website: www.baxter.com C. KPMG; Website: www.kpmg.com Focus on the following aspects: Are the companies required to comply with regulatory systems and to participate in any emissions markets? Describe these regulations and markets. Are carbon emissions reductions voluntary? Is the company?s strategy focused on internal emissions reductions, or participation on carbon markets? Give examples of actions taken by the company to reduce emissions internally. Give examples of carbon instruments used by the company. Compare the policies followed by the three companies. 2 Problem 3. Case Study Intrinergy and Carbon Offsets (A) The case illustrates how a project?s value is impacted by potential revenues from carbon offsets. 3.1. Complete the analysis in the spreadsheet provided by adding the value of carbon credits. Forecast the price of carbon and also the price of natural gas using the Monte Carlo simulation method. You may assume that both prices follow an arithmetic random walks or the lognormal distribution. The case provides historical data for the price of natural gas and the carbon credit offset prices per Ton (CFI) on the CCX. A simple way of implementing this methodology is summarized next. Assume that both the price of carbon credits and natural gas follow a lognormal distribution. If the price on date t is St, then the price on date t+1 can be computed as: = ? + ? where ? is the average rate of growth, ? is the standard deviation of the returns, Dt is the time that has passed, and Z is a draw from a random variable that is standard normal. Both ? and ? can be estimated from the historical sample. If ? and ? are annual values and Dt is one day, then Dt is equal to 1/250=0.004, assuming 250 trading days in a year. Notice that the historical data provided in Exhibit 1 is in quarters, and the analysis in the spreadsheet is also in quarters. Z can be generated using the excel functions NORM.S.INV(RAND()) or the tool in Data/Data Analysis/Random Number Generation (mean is 0 and standard deviation is 1). Simulate at least 10 paths for the prices, and for each path document the cost of keeping steam production in-house and of each of the outsourcing options. 1.2. Based on the previous analysis, discuss the challenges faced with incorporating carbon offsets in the value of a project. In your discussion consider that at the time the congress was debating the Waxman-Markey bill (page 4 in the case) and that the estimation of carbon prices was based on CCX historical prices. Problem 4. Case Study International Carbon Finance and EcoSecurities. EcoSecurities is an aggregator of carbon credits and also invests directly in projects that produce carbon credits. The Ventilation Air Methane (VAM) Project was an opportunity to break into a new sector with large potential, and the economics and risks of the project needed to be assessed. 4.1. Estimate the CFs from operations and the NPV for the VAM project. 4.2. What is the highest rate for Tecterra?s lease fee such that the project is still viable for EcoSecurities? 4.3. Estimate the value for the scenarios of UN approval or not, including the resulting impact on CERs prices. Estimate the expected value of the project based on the probabilities of UN approval.

AF 631: Environmental Accounting and Finance Spring 2014 Assignment III - Carbon Markets / Emissions Trading Submit your responses by email. The submission deadline is Tuesday, May 6th. Problem 1. Acid Rain: The Southern Company (A) The case introduces a framework for the analysis that supports managerial decisions on how to comply with emissions reductions regulation, in this case the 1990 Clean Air Act amendments. 1.1.The company has several options available for complying with the new law. The cost of these options is derived either from investments required to reduce emissions internally in the company, or from purchasing allowances. Two options were studied in class. Estimate the cost of pursuing the following additional options: A. The company installs scrubbers in 2000. B. The company switches to low-sulfur coal in 1996. C. The company switches to low-sulfur coal in 2000 (Phase II). D. The company switches to low-sulfur coal in 1996, and installs scrubbers in 2000. E. The company switches to low-sulfur coal in 2000, and installs scrubbers in 2000. 1.2. Based on the cost of implementing each option, what should the company do? Problem 2. Describe the climate change policies followed by each of these companies: A. NRG Energy (NYS: NRG); Website: www.nrgenergy.com B. Baxter International (NYS: BAX); Website: www.baxter.com C. KPMG; Website: www.kpmg.com Focus on the following aspects: Are the companies required to comply with regulatory systems and to participate in any emissions markets? Describe these regulations and markets. Are carbon emissions reductions voluntary? Is the company's strategy focused on internal emissions reductions, or participation on carbon markets? Give examples of actions taken by the company to reduce emissions internally. Give examples of carbon instruments used by the company. Compare the policies followed by the three companies. 1 Problem 3. Case Study Intrinergy and Carbon Offsets (A) The case illustrates how a project's value is impacted by potential revenues from carbon offsets. 3.1. Complete the analysis in the spreadsheet provided by adding the value of carbon credits. Forecast the price of carbon and also the price of natural gas using the Monte Carlo simulation method. You may assume that both prices follow an arithmetic random walks or the lognormal distribution. The case provides historical data for the price of natural gas and the carbon credit offset prices per Ton (CFI) on the CCX. A simple way of implementing this methodology is summarized next. Assume that both the price of carbon credits and natural gas follow a lognormal distribution. If the price on date t is St, then the price on date t+1 can be computed as: = + where is the average rate of growth, is the standard deviation of the returns, t is the time that has passed, and Z is a draw from a random variable that is standard normal. Both and can be estimated from the historical sample. If and are annual values and t is one day, then t is equal to 1/250=0.004, assuming 250 trading days in a year. Notice that the historical data provided in Exhibit 1 is in quarters, and the analysis in the spreadsheet is also in quarters. Z can be generated using the excel functions NORM.S.INV(RAND()) or the tool in Data/Data Analysis/Random Number Generation (mean is 0 and standard deviation is 1). Simulate at least 10 paths for the prices, and for each path document the cost of keeping steam production in-house and of each of the outsourcing options. 1.2. Based on the previous analysis, discuss the challenges faced with incorporating carbon offsets in the value of a project. In your discussion consider that at the time the congress was debating the Waxman-Markey bill (page 4 in the case) and that the estimation of carbon prices was based on CCX historical prices. Problem 4. Case Study International Carbon Finance and EcoSecurities. EcoSecurities is an aggregator of carbon credits and also invests directly in projects that produce carbon credits. The Ventilation Air Methane (VAM) Project was an opportunity to break into a new sector with large potential, and the economics and risks of the project needed to be assessed. 4.1. Estimate the CFs from operations and the NPV for the VAM project. 4.2. What is the highest rate for Tecterra's lease fee such that the project is still viable for EcoSecurities? 4.3. Estimate the value for the scenarios of UN approval or not, including the resulting impact on CERs prices. Estimate the expected value of the project based on the probabilities of UN approval. 2 TERMINOLOGY United Nations Framework Convention on Climate Change The UNFCCC was established in 1992 at the Rio Earth Summit and sets an overall framework for international efforts to fight against climate change. Its main objective is the \"stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system\". http://unfccc.int Kyoto Protocol The agreement reached in Kyoto, Japan, in 1997, committing developed countries (Annex I countries) to achieve quantified targets for decreasing their emissions of GHGs. Annex I countries Developed countries that, under the Kyoto Protocol, have accepted GHG emissions reductions obligations and must submit annual GHG inventories. Non-Annex I countries Developing countries that have no GHG emission-reduction obligations under the Kyoto Protocol, but may participate in the Clean Development Mechanism. Assigned Amount Unit (AAU) Allowances issued to Annex I countries. These countries have a cap on their emissions under the Kyoto protocol. Each AAU grants the country the right to emit one ton of GHG during the commitment period. Certified Emissions Reductions (CERs) Carbon credits that arise from Clean Development Mechanism projects. One CER is awarded for a reduction of one ton of CO2 eq. Clean Development Mechanism Mechanism under the Kyoto Protocol allowing industrialized countries (Annex I countries) with GHG reduction commitment to invest in projects that reduce emissions in developing countries (non-Annex I countries) as an alternative to more expensive emission reductions in their own countries. Joint Implementation Mechanism under the Kyoto Protocol allowing Annex I countries to invest in emissions reduction projects in another Annex I country. Emissions Reduction Unit Carbon credits arising from Joint Implementation projects, with one ERU awarded for a reduction of one ton of CO2 eq. Cap-and-trade Emissions trading program under which the regulatory bodies establish a cap on the aggregate level of emissions, called the emissions cap. The participants in the program receive credits distributed by regulatory authorities which correspond to the amount of pollution that they are allowed to emit over a certain period. If they exceed the cap, they have to buy credits from other participants who have excess credits. If they have polluted less than their allowance they will have excess credits and can sell these credits. Baseline-and-credit Under this program the regulatory authority assigns emissions output baseline for all polluters, then compares expected and actual emissions. Polluters who emit below their baseline level receive credits, while polluters who emit above their baseline levels must purchase credits. These credits can be traded. Offset Is a type of commodity that represents the reduction of one metric ton of CO2 by a qualified carbon-reduction project. It represents an activity that prevents or compensates the emission. Examples: renewable-power generation, energy efficiency projects, and forestry and industrialwaste remediation. Renewable energy certificates (REC) Is a type of offset. A REC represents a claim that one MWh of electricity was produced using an approved renewable energy source. RECs can be converted into carbon offsets, usually by proving that renewable energy generated is offsetting an equivalent amount of carbon-based electricity production that would have been produced elsewhere in the grid. States also mandate electric utilities to purchase a percentage of the power from renewables. Utility can either buy in-state power from renewable sources, or may buy RECs out-of-state. Annex I countries There are 41 Annex I countries and the European Union is also a member. These countries are classified as industrialized countries and countries in transition to a market economy. Australia, Austria, Belarus, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, United States of America Conferences of the Parties Since the 1992 UNFCCC, the parties have been meeting annually in Conferences of the Parties (COP) to assess progress in dealing with climate change. 1995 - COP 1, The Berlin Mandate 1996 - COP 2, Geneva, Switzerland 1997 - COP 3, The Kyoto Protocol on Climate Change 1998 - COP 4, Buenos Aires, Argentina 1999 - COP 5, Bonn, Germany 2000 - COP 6, The Hague, Netherlands 2001 - COP 6 bis, Bonn, Germany This meeting took place after George W. Bush had become the President of the United States and had rejected the Kyoto Protocol in March 2001; as a result the United States delegation to this meeting declined to participate in the negotiations related to the Protocol and chose to take the role of observer at the meeting. Introduced the Flexible Mechanisms: Joint Implementation (JI); and the Clean Development Mechanism (CDM) 2001 - COP 7, Marrakech, Morocco 2002 - COP 8, New Delhi, India 2003 - COP 9, Milan, Italy 2004 - COP 10, Buenos Aires, Argentina 2005 - COP 11/MOP 1, Montreal, Canada 2006 - COP 12/MOP 2, Nairobi, Kenya 2007 - COP 13/MOP 3, Bali, Indonesia 2008 - COP 14/MOP 4, Pozna, Poland 2009 - COP 15/MOP 5, Copenhagen, Denmark 2010 - COP 16/MOP 6, Cancn, Mexico 2011 - COP 17/MOP 7, Durban, South Africa 2012 - COP 18/MOP 8, Doha, Qatar 2013 - COP 19/MOP 9, Warsaw, Poland BASECASE BurMills NatGas Cost (MMBtu gas) OpEx Tax Shield BurMills Cost to Continue Using Natural Gas $75 FIXED FLOATING BurMills's Carbon Credit Value Steam Purchases OpEx Tax Shield BurMills Cost for Fixed Price BurMills's Carbon Credit Value Steam Price, Floating (MMBtu gas) Steam Price, Floating (MMBtu steam) Steam Purchases OpEx Tax Shield BurMills Cost for Floating Price $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $726 $255 $473 $0 $0 $0 $0 $0 $0 $0 $0 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $1,142 $400 $742 $0 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $6.00 $7.50 $797 $279 $518 $0 $0 $0 $0 $0 $0 $0