EMISSIONS TRADING: WHAT IT’S ALL ABOUT

Like New Energy, emissions trading is rapidly becoming a nonpartisan passion of a surprising alliance of thinkers. Investment banks, environmentalists, utilities, industrials, climate change fighters and hedge funds (running the gamut from GE, Goldman Sachs, J.P. Morgan Chase and AES to the Environmental Defense Fund, the EU and the Kyoto alliance) are boosters of “carbon finance.”

Why?

Marc Gunther, Fortune Magazine: “If all goes according to plan, the business of buying and selling rights to pollute the atmosphere with carbon dioxide and other greenhouse gases - carbon trading, as it is known - will curb global warming and save the world. That is its only purpose. Along the way, a lot of people will get rich.”

In other words, people are getting enthusiastic about emissions trading for the same reasons that brought New Energy’s nonpartisan coalition together: Doing good and doing well.

There’s just one small hurdle. Gunther: “[The emissions market] is surely the most bizarre, complicated, and controversial new industry of the 21st century…”

Making the leap is likely to be entirely worth the effort. Example:

Farmer Daniel Co in the Phillipines postponed spending $200,000 to install methane disgesters for capturing electricity-generating biogases from his 10,000 pigs’ manure until EcoSecurities got him almost 3000 emissions trading credits/year for doing it. EcoSecurities paid Co $4/credit/year, or $12,000. Co also gets $48,000/year for the biogas-generated electricity.

EcoSecurities sells the credits to French bank Cassais des Depots at $18/credit/year for a $42,000/year profit. That's a pretty impressive profit, maybe even too impressive. It may indicate a need for regulatory oversight. Or it may suggest the difficulty (and expense) of identifying valid emissions-reduction projects.

The bank will either hold the credits until they go up in price or sell them. There is risk to the investors along the chain because the credits are a market commodity, subject to fluctuations in value.

The bank expects to eventually sell the credits at a profit to an EU company that has exceeded its emissions allowance and urgently needs credits to avoid EU fines. Yes, it does give the end-use companies in properly carbon-constrained societies like the EU "permission" to emit. But only because Daniel Co legitimately and verifiably cut an equal amount of emissions.

As caps are progressively tightened down, credits become more expensive and overall emissions drop.

Some think cap-and-share would make cap-and-trade more equitable. (click to enlarge)

There are 4,000 projects awaiting UN Clean Development Mechanism (UN CDM) approval. Almost every New Energy project in China will be eligible for trading credits. And there are high hopes the UN CDM will institute a program for paying equatorial nations to prevent rainforest deforestation.

The emissions trading world is not without its problems. One of the things holding up the CDM’s proposed REDD program to protect rainforests (see REDD: TRADE EMISSIONS AND SAVE THE AMAZON?) is the potential for scamming the system. The reason so many projects are in the UN CDM pipeline instead of funded and on their way into operation: Questions about “additionality.”

“Additionality” is what emissions credits are supposed to create: Additional emissions reductions by otherwise unfunded projects. Instead, some entrepreneurs seem to see selling credits as just another mode of “creative” financing.

Lambert Schneider, environmental researcher, Öko-Institut: "…if you are doing something that is common practice, why should you get CDM credit for that?"

The scamming of the system was noticed in the financing of biomass plants for the burning of “bagasse,” the leftover roughage in sugar cane fields after the harvest of the crop for sugar ethanol.

Example: Agrinergy Ltd. applied for emissions credits on behalf of a bagasse mill to be built by Shree Chhatrapati Shahu Co-operative Sugar Factory Ltd. mill in India. Turns out the return on the project would be 7.89% without revenue from selling emissions credits and 12.47% with it.

Robert Taylor, Agrinergy consultant: "Saying what return on a project is required is not a science…"

No, it’s math. Daniel Co’s math might not have added up without CDM participation. The Indian bagasse mill will likely do just fine without it.

Cap-and-trade is a valid, doable concept. It had a lot to do with the successful mitigation of U.S. acid rain. Global climate change is a much bigger undertaking and there will always be players looking to game any system.

The good news: The UN CDM is proceeding warily. Its historic 6% project rejection rate is rising. The better news: It is proceeding.

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Carbon finance comes of age; The cap-and-trade market for emissions – coming soon to America – is creating huge new opportunities for business
Marc Gunther, April 17, 2008 (Fortune via CNN Money)
and
Some Carbon-Credit Projects Find a Tougher Road to Approval
Charles Forelle, April 22, 2008 (Wall Street Journal)

WHO
United Nations Clean Development Mechanism (UN CDM); Daniel Co and family, operators, Uni-Rich Agro Industrial pig farm; EcoSecurities; Cassais des Despots, Agrinergy Ltd., Shree Chhatrapati Shahu Co-operative Sugar Factory Ltd.

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WHAT
Emissions trading via Certified Emissions Reduction (CER) credits: How and why it is galvanizing the attention of financial institutions and environmentalists around the world.

WHEN
- 2007: Emissions trading value reached $60 billion.
- 2020: Market value expected to reach $1 trillion/year.
- 2005: 27 bagasse projects submitted for CDM registration; all were approved within months.
- 2006-2008: 53 bagasse projects submitted, 13 rejected.

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WHERE
- The bulk of emissions trading so far has been limited to Europe and Japan, where emissions are regulated.
- The rest of the world is ripe for picking.
- Uni-Rich Agro Industrial pig farm is in the province of Tarlac in the Philippines.

WHY
- 1 CER credit = 1 tonne of CO2 emissions prevented.
- Daniel Co chose not to spend the $200,000 to convert the manure from his 10,000 pigs to electricity-generating biogas until he had the opportunity to earn credits for sale in the emissions markets for doing so.
- Similar opportunities to earn credits: chicken farms in India, landfills in Mexico, coal mines in Thailand, refrigerant and fertilizer plants in China, hydroelectric dam projects in Guatemala, wind farms in Mongolia
- Jet travel emissions are expected to soon become part of the trading program.

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QUOTES
- Fred Krupp, president, Environmental Defense Fund/co-author,Earth: The Sequel: "Cap and trade changes everything…"
- UN CDM approval board, ruling against granting credits for the Indian bagasse mill: "[It is not] additional…the claim that CDM was needed in securing financing for the project is not credible."