Friday, June 18, 2010

The Fannie Mae Patent on a "System and method for residential emissions trading": Securitization in the Carbon Markets (FNM; GS)

Was this the plan to bail out Fannie and Freddie?
Back in April we posted "Fannie Mae owns patent on residential 'cap and trade' exchange" (FNM):
Seeing what a fine job the GSE's did with their core businesses, what the hell, let's have at it....
More backround in December '09's "Woman Who Invented Credit Default Swaps is One of the Key Architects of Carbon Derivatives, Which Would Be at the Very CENTER of Cap and Trade":
Again, so much for Krugman's:
...Oh, and the argument that if you create a market, you’re opening the door for Wall Street evildoers, is bizarre. Emissions permits aren’t subprime mortgages, let alone complex derivatives based on subprime; they’re straightforward rights to do a specific thing. It will truly be a tragedy if people generalize from the financial crisis to block crucially needed environmental policy....
From his Dec. 7 post: -Unhelpful Hansen

If you read the "FIELD OF INVENTION" and the "BACKROUND OF INVENTION" in the patent you can see exactly where this is headed :
The present invention relates to a method of residential emissions trading and a residential emissions trading commodity. In particular, the present invention is directed to a method of identifying, quantifying, and aggregating reductions in residential emissions into a form in which they can be traded for consideration. The present invention further comprises a method for measuring, monitoring, and verifying residential energy savings and the resulting emissions reductions. Energy savings are quantified and aggregated to produce a commodity that may be traded in any suitable program, facility, or transaction.
...Emission trading is also contemplated on an international level. The 1997 Kyoto Protocol, an agreement pursuant to the United Nations Framework Convention on Climate Change, provides for "bubbles" or the pooling of obligations within groups of countries, e.g., the European Union, for GHG. Other proposals under the Kyoto Protocol include international trading of emissions among certain countries, and credit for joint projects implemented in certain countries. A number of countries have ratified the Kyoto Protocol.

The various schemes described above provide substantial incentives for certain sources of pollution, such as utilities and industrial plants, to reduce their emissions. Notably lacking in these schemes, however, are programs for capturing the benefits of potential energy efficiency measures and the resulting emissions reductions by residential consumers.

Theoretically, residential emission reductions could be recognized under a variety of emissions trading programs. However, four hurdles have historically kept reductions from residential housing sources off the market: 1. Residential emission savings are generated in very small quantities relative to those sought by the market; 2. Residential emission savings are not yet fully recognized by prior known regulatory regimes; 3. Residential emission savings are generated by many, many homeowners with no means or incentive for collective action; and 4. Transaction costs--those associated with quantifying, certifying, marketing, selling, and transferring the reductions--have been prohibitive.

Residential housing units account for approximately one-fifth of GHG emissions in the U.S. Building more efficient homes, retrofitting existing ones, and/or making other structural and fuel changes can dramatically decrease the amount of energy used. Energy efficiency improvements are made to residential units in some instances in response to energy company demand-side management programs, consumer upgrades, and/or builder incentives. Yet, the energy savings from a simple individual home has a non-measurable impact at electricity generation plants. The aggregate impact of energy efficiency upgrades to thousands of homes, however, could have a significant impact, such as reductions in peak load.

These decreases in energy consumption naturally lead to a reduction in air pollutant emissions (i.e., criteria pollutants and GHG). Other measures, such as switching to low-VOC paints, paving driveways, and improving home design, can also have significant impacts on air pollution. Although the air quality impact of a single energy efficient home is relatively small, the result can be quite dramatic when the emissions reductions from large numbers of homes are aggregated together. When the individual residential energy savings are aggregated in sufficient volumes, embodiments of the present invention contemplate that the aggregation will represent a significant tradable commodity in existing and future emissions trading markets.

Embodiments of the present invention have many potential benefits and advantages. Energy costs are typically the second largest cost for homeowners. A program that provides incentives to invest in energy efficiency will save the homeowner money. It has been estimated, for example, that an efficient house can save 30% on annual energy bills. In addition, embodiments of the present invention may create a valuable new commodity and decrease the cost of energy efficiency. Embodiments of the present invention may reduce the amount of air pollution associated with housing: an energy efficient house may save 2-3 tons of CO.sub.2 per year and 3-5 lbs. of NO.sub.x per year.

It is therefore an advantage of some, but not necessarily all, embodiments of the present invention to provide a method for trading residential emissions.

It is another advantage of embodiments of the present invention to provide a residential emissions trading commodity.

It is another advantage of embodiments of the present invention to identify energy savings opportunities in residential properties.

It is yet another advantage of embodiments of the present invention to provide a method for converting an aggregate of residential emissions reductions into a tradable commodity that can be marketed.

Additional advantages of the invention are set forth, in part, in the description that follows and, in part, will be apparent to one of ordinary skill in the art from the description and/or from the practice of the invention.... 
Carbon Backed Securities.
Collateralized Carbon Backed Securities.
What could possibly go wrong?

Well, back in our October 2008 post "Carbon: Goldman Sachs Hooks Up with Blue Source" we repeated ourselves:
...The verifiers hold exactly the same position in the carbon world as appraisers do in the mortgage biz.

As we get into structured carbon finance (carbon notes, carbon backed securities) really slicing and dicing the cash flows, there will be room for all kinds of shenanigans. The key difference is that whereas Mortgage Backed Securities had real estate (even if overvalued) backing them, CBS's will be built on the absence of an invisible gas. Is it any wonder that GS is interested?
We'll have more next week.
In the meantime the WSJ's Developments blog is headlining:
Real Estate News: Realtors, Brokers Target Home-Appraisal Rule