Carbon Management Strategies

1. Carbon Management Strategies September 29, 2009

2. Presentation Overview • Regulatory Drivers for Change • Why Set Targets for Emissions Reductions? • Evaluate Opportunities for Reductions • Identifying and Implementing Offset Projects • Next Steps

3. The Pathway to GHG Reduction

4. Regulatory Drivers for Change

5. A Driver: American Clean Energy and Security Act (ACES) of 2009 (aka Waxman-Markey) • Title I - Federal Renewable electricity standard, carbon capture and storage technology, coal power plant performance standards, low carbon fuel standards, and smart grid advancement • Title II - Building, lighting and appliance energy efficiency and mobile source efficiency standards • Title III - Cap and Trade (establishes both allowance and offset trading programs) • Title IV - Proposals to preserve domestic competitiveness and support workers, provide assistance to consumers, and support domestic and international adaptation initiatives • Title V – Agricultural and Forestry Related Offsets

6. ACES - Title III Cap and Trade GHGs included- CO2, CH4, N2O, HFCs, PFCs, SF6, and NF3 Cap and Trade defined as a system which enforces an economy-wide limit on greenhouse gas emissions through the implementation of renewable energy, and reduces emission limits over time http://energycommerce.house.gov/index.php?option=com_content&view=article&id=1633:the-american-clean-energy-and-security-act-of-2009-hr-2454&catid=169:legislation&Itemid=55 Entities covered Large stationary sources with GHG emissions > 25,000 tons/year GHGs (most water utilities are likely less than this threshold) Producers / Importers of all petroleum fuels Sellers of natural gas Producers of “F-gases” Other specified sources Drivers for Change: Cap and Trade is Coming

7. Establishes national U.S. emission caps relative to 2005 ACES - Title III Cap and Trade

8. Federal Reporting Program – EPA GHG MRR Mandatory Reporting Rule Signed by EPA on Sept 22 • In general, applies to any facility with emissions > 25,000 tpy CO2-e total emissions from listed source categories • Approximately 40 listed source categories, of which 11 were deferred while EPA works on monitoring and verification issues • Scope 2 emissions and Scope 1 mobile emissions not included • Annual reporting due, calendar year reports due by March 31 of following year

9. Adaptation Planning is Coming, Too! • ACES calls for development of a National Climate Change Adaptation Council (under Title IV) • Responsible for: • Periodic National Vulnerability Assessments • Providing policy-relevant scientific information, research products, decision tools, and technical support related to Climate Change impacts and adaptation • Vulnerability Assessments • Regional and national vulnerability to Climate Change impacts • Strategies to adapt • Priorities for further research

10. What is Adaptation? • Climate change adaptation includes changes in society’s policies, practices, systems, infrastructure, and operations to manage risks and impacts resulting from existing and future climate change effects • Adaptation is complementary to mitigation, which reduces Greenhouse Gas emissions to reduce future climate change effects

11. ACES Adaptation Planning • Within 1 year of publication of each National Assessment, each Federal agency shall complete an agency climate change adaptation plan detailing the agency’s current and projected efforts to address the potential impacts of climate change • Review of impacts – current and future • Description of priorities for building adaptive capacity • Review of the agency’s current efforts to address Climate Change • Description of initiatives including • Strategic objectives • Resources • Timelines • Benchmarks and methods

12. What do Regulatory Drivers mean for Water Utilities? • Based on regulation, entities covered • Large stationary sources with GHG emissions > 25,000 tons/year Scope 1 GHGs • However, unlikely that most water utilities will be > 25,000 tons/year of direct GHG emissions • For example, mid-sized water utility in the Bay Area (wholesaler with significant source water pumping) generated approximately 10,000 tons/year of Scope 1 GHG emission in 2006. • Therefore, unlikely that most water utilities will be regulated. • However, water utilities may have an opportunity to participate in the market through sale of carbon offsets.

13. Emissions Cap Compliance Period Emissions Trading: Regulatory Allowance Surplus Emissions Prior to Cap Allowance Surplus Available to Sell or Bank Emission reductions via technology, maintenance, reduced production, etc. Emissions After Cap in Effect

14. Emissions Cap Compliance Period Emissions Trading: Regulatory Allowance Deficit Emissions Prior to Cap Emission decrease insufficient Emissions After Cap in Effect Allowances Deficit Need to Buy Allowances or Offsets

15. Why Set Targets for Emissions Reductions?

16. Why Set GHG Emission Reduction Targets? Though regulatory drivers may not currently apply: • Setting a Reduction Target drives organizational innovation • Environmental stewardship & public perception improve • Climate-related targets have a positive influence on employee morale. • In all cases internal communications are important—increasing employee understanding of climate change helps: • Gain buy-in to the target • Generates new ideas on how to improve environmental performance. • “Action” Benefits of Targets: • Gives Action Plan a tangible, specific goal • Allows measurement of progress and credit for results. • Helps prioritize actions

17. Target Framework • Time Frame • Near-term (1 – 3 years) • Long term (5 – 20+ years) • Objective • Aspirational • Results-based • Scope • International / Domestic • Sectoral / company-wide / business unit / facility-wide / process specific

18. Target Setting Approaches • A “top-down” target-setting process sets the level for the whole water utility at once, without a sector by sector analysis. • Kyoto reduction commitments • Industry bench-marks • Under a “bottom-up” process, the water utility target level is based on analysis of potential reductions in individual sectors • Short-term, cost-effective reductions • Efficiencies of upcoming projects • Technology implementation • Management system improvements

19. Optimizing Assets and Products • Potentially reduce costs through more carbon efficient operations • Many GHG reduction opportunities have net positive payback due to energy savings or other cost reductions • If reductions qualify as offsets, potential revenue stream • Design carbon reduction programs with ambitious targets • Couple energy and carbon efficiencies to maximize gains • Cut costs and reduce carbon emissions throughout your supply chain • Design clear mandates, key performance indicators when selecting and negotiating with suppliers

20. Building “Shareholder” Value • Completing the GHG emissions inventory will provide actual numbers from which to develop sustainability goals, set reduction targets, or report externally • Carbon Disclosure Project (Goals and Objectives) • Global Reporting Initiative (Sustainability Reports) • Various voluntary programs or registries (Inventory Numbers) • Allows water utility to report with confidence to stakeholders and customers; • Meets evolving standards of ‘fiduciary responsibility’ and materiality expectations of investors, customers, etc.

21. Evaluate Opportunities For Reductions

22. Energy Efficiency Projects Completion of a GHG Inventory: • Allows for analysis of fossil fuel use (stationary and mobile sources) and utility usage (e.g. electricity and steam); • Allows identification and ranking, by facility, state, or region, of assets that are large emitters of GHGs and heavy users of energy; • Evaluation of energy use allows firm to evaluate cogeneration options, alternative fuels, or the purchase of renewable energy certificates, if desired; • Guide recommendations for future capital allocations (i.e. process upgrades, expansions, new plants, etc.) • Facilitates benchmarking amongst industry peers.

23. Process of Generating a Reduction Project Quantify emission reductions by: • Define the emission reduction project • Determine the baseline scenario for each project activity • Determine boundaries • Quantify emission reductions • Monitoring/reporting/verification • Adhere to specific policy-related considerations, as applicable Additionality Requirements for Offsets must be observed (to be discussed)

24. Water Utility Reduction Opportunities • Building Energy Efficiency • Efficiency of motors, pumps, hydraulic systems • Alternative Fuels • Renewable Energy • Management of Mobile Sources • Land Use, Land Use Change, Forestry (LULUCF) • External Projects • Purchase of Carbon Offsets / RECs

25. U.S. mid-range abatement cost curve – 2030 Abatement cost <$50/ton Reducing Costs through Carbon-Efficient Operations Residential buildings – HVAC equipment efficiency Commercial buildings – HVAC equipment efficiency Cost Real 2005 dollars per ton CO2e Afforestation of cropland Coal power plants– CCS rebuilds with EOR * Industrial process improve-ments Residential buildings – Shell retrofits Coal mining – Methane mgmt Solar CSP Fuel economy packages – Light trucks Active forest management Distributed solar PV * Residential electronics Commercial buildings – Combined heat and power Commercial buildings – Control systems Nuclear new-build Residential water heaters * Residential buildings – Lighting * * * * * * * * * * * * * * * * * * Potential Gigatons/year Onshore wind – Low penetration Industry – CCS new builds on carbon-intensive processes * Onshore wind – High penetration Industry – Combined heat and power Biomass power – Cofiring * Cellulosic biofuels Manufacturing – HFCs mgmt Car hybridi-zation Existing power plant conversion efficiency improvements Coal power plants – CCS new builds with EOR * Residential buildings – New shell improvements Onshore wind – Medium penetration Coal-to-gas shift – dispatch of existing plants Commercial electronics Conservation tillage Winter cover crops * Commercial buildings – CFL lighting Coal power plants – CCS rebuilds Reforestation -23* * Commercial buildings – LED lighting Commercial buildings – New shell improvements Afforestation of pastureland Coal power plants – CCS new builds Natural gas and petroleum systems management 4.2 gigatons/yr Negative or No Life-Cycle Costs Fuel economy packages – Cars Source: McKinsey analysis

26. Developing an Offset Project

27. Carbon Offsets • Tradable commodities typically representing the reduction or sequestration of one metric ton of CO2-e • Compliance-based or voluntary instruments • Certified Emission Reductions (CERs) in the Kyoto Protocol Clean Development Mechanism (CDM) • Utility could sell offsets • Utility could invest in actions outside of its boundaries to create reductions However, must satisfy offset accounting standards. In addition, methodologies specifically for that project type must exist for the voluntary or compliance offset trading program

28. Emissions Cap Compliance Period Emissions Trading: Regulatory Allowance Deficit (A Reminder) Emissions Prior to Cap Emission decrease insufficient Emissions After Cap in Effect Allowances Deficit Need to Buy Allowances or Offsets

29. Offset Accounting Standards: Additionality • New projects that otherwise would not have occurred • Regulatory Surplus • Not required by law, regulation, permit, etc. • Implementation Barriers • investment barriers • technological barriers • institutional barriers • Common Practice • Not a usual activity

30. Offset Accounting Standards: Additionality, continued • The assurance of additionality is required to produce a credit for transaction. • Projects only receive marketable credits for doing better than “business as usual” and showing that they have resulted in a net reduction of carbon in the atmosphere. Sequestration with project Sequestration without project: “business as usual” This reduction is creditable. $

31. Offset Accounting Standards: Permanence • Permanence: For example, a critical issue with offset projects like forests is guaranteeing the permanence of their atmospheric benefits as a carbon sink. • The carbon stored by forest projects, can be re-emitted in the future. Therefore, it may not result in a permanent reduction in atmospheric greenhouse gases. When a reversal occurs, the credit issued to project becomes invalid. • Several instruments have been developed to manage the risk of reversals, including reserves of credits, aggregation schemes, and insurance mechanisms. These can ensure that liabilities are covered and the necessary incentives are maintained, while allowing flexibility for project developers.

32. Offset Accounting Standards: Transparency and Governance • Transparency and Governance. The issue of market transparency and fairness is paramount to the success of any fledgling carbon offset market. Without ensuring trust in the market and the integrity of the underlying commodity, trade will not occur and the market will fail. • International compliance markets and voluntary carbon markets in the United States have made strides in recent years on issues of accountability and standards of assurance for forest and land based offset projects. • Providing for impartial, third-party monitoring, verification and assurance of eligible land-based projects is essential.

33. Project Life Cycle Project development cycles for offsets depend heavily on the requirements of the cap and trade framework, but typically involve the following steps:

34. Waxman Markey Early Offset Supply • Bill requires Administrator to issue one credit for each t/CO2e emissions reduced, avoided, or sequestered if: • The offset project was started after Jan 1, 2001 • The reduction occurred after Jan 1, 2009 and before the date 3 years after the bill’s enactment (whichever is sooner) and; • the offset credit was issued under any State, tribal or voluntary GHG emission offset program that the administrator determines: • was established prior to Jan 1, 2009 • has developed offset project type standards, methodologies, and protocols through a public consultation process • has publicly published standards, methodologies, and protocols that require credited emission reductions to be permanent, additional, verifiable and enforceable; • requires that all credits are registered with individual serial numbers.

35. Waxman Markey—Role of Offsets • EPA Administrator to publish list of eligible offset types, establish oversight program. • 9 member Offsets Integrity Advisory Board (OIAB) to provide a list of recommended offset project types to Administrator within 90 days of bill’s passage. • In 2017 and every 5 years thereafter, OIAB shall submit a public scientific review of offset and deforestation programs including methodologies. • International offsets allowed • Maximum 2 billion tons of offsets (1 billion domestic, 1 billion international)

36. Waxman Markey and Offsets • Currently proposed U.S. legislation in the Congress, Waxman-Markey H.R. 2454, includes provisions to: • Establish an Offsets Integrity Advisory Board to “provide recommendations . . . regarding offset project types that should be considered for eligibility . . .” (Sec.731 (c)(1); • Promulgate regulations establishing a program for the issuance of offset credits (Sec. 732 (a) and refers to “projects that result in reductions or avoidance of greenhouse gas emissions or sequestration of greenhouse gases.” (Sec. 732 (b) (i)). • Designate the U.S. Department of Agriculture to manage a land-based offset program including Agricultural offsets and Forestry offsets. This has implications for Forestry, Ag Methane, etc.

37. U.S. Offset Markets

38. Next Steps

39. Short Term Steps towards Strategy Development • Understand and quantify your CO2e emission sources from supply chain to distribution – develop your baseline. • Analyze your position with regulations - need for allowances or ability to develop offsets. • Identify other drivers for action, including environmental stewardship goals. • Consider your data collection strategy carefully; integrate systems where possible. Avoid the temptation to create “data islands”. • Analyze, prioritize and publicize your emission reduction priorities. • Set ambitious goals and initiate positive return emission reduction projects now. • Incorporate your GHG reduction strategy into your CIPs and design projects. • Develop and implement external communication plan.

40. Questions?