By the OGJ Online Staff
HOUSTON, Feb. 18 -- With the UK market opening this year, greenhouse gas emissions trading could get its biggest boost yet, and US global corporations are paying close attention, despite uncertainty over US global warming policies.
The UK is pioneering a national pilot greenhouse gas (GHG) emission trading program, setting what could become the precedent for other nations to follow. The European Union is scheduled to begin an emissions trading program in 2005.
Industry participants say interest has also ballooned since November after climate change negotiators meeting in Marrakesh, Morocco, hammered out rules for international emissions trading under the Kyoto Protocol. That helped lay the groundwork and gave companies enough guidance and confidence to proceed, says Kedin Kilgore, a trader with emissions broker Natsource LLC, New York.
Interest has increased "ten-fold in the last 3 months," he said, with companies now willing to sell GHG emissions for 2008-12. Kilgore estimated the GHG market could total about $800 million to $1 billion/year, involving up to 200 million tonnes/year. Many of these ad hoc deals haven't been disclosed publicly, he said, making it hard to get a firm handle on the market. Kilgore said prices are in the $3-$6/tonne range.
With respect to curbing greenhouse gas emissions, the US continues to urge caution. In the first indication of a policy since he rejected the Kyoto treaty, US President George W. Bush earlier this month proposed a global warming policy that is linked to a program to reduce power plant emissions of nitrogen oxides, sulfur dioxide, and mercury by 70% using a market-based approach (OGJ Online, Feb. 14, 2002).
The White House said the climate change policy would commit the US to "an aggressive" strategy to cut greenhouse gas (GHG) "intensity" by 18% over the next 10 years. It defined GHG intensity as the ratio of greenhouse gas emissions to economic output.
The administration's goal is to lower the US rate of emissions from an estimated 183 metric tons/$1 million of GDP in 2002 to 151 metric tons/$1 million in 2012. It said, "By significantly slowing the growth of greenhouse gases, this policy will put America on a path toward stabilizing GHG concentration in the atmosphere in the long run, while sustaining the economic growth needed to finance our investments in a new, cleaner energy structure.
President George W. Bush rejected the Kyoto treaty soon after taking office, saying its proposal for the US to reduce emissions 7% below 1990 levels within a decade was too costly and the science was still unproven.
In a report to Congress, the White House Council on Economic Affairs also criticized proposals for a global tradable "permit" system as a "distraction" from developing more realistic measures. But the report praised domestic market-based trading programs for sulfur dioxide, nitrogen oxides, and carbon dioxides.
While the mechanism and rules may vary, the basic mission of these programs is to allow companies to pay for offsetting carbon dioxide (CO2 emissions. Up to now most deals have been bilateral trades involving North American, Danish, Japanese, and Canadian firms testing the waters of an emerging market.
Companies are tackling the market differently. Canadian power companies, including BC Hydro, Ontario Power Generation Inc., and TransAlta Corp., Calgary, have been buyers and sellers. In the US, Entergy Corp., New Orleans, La., has participated in the emissions market, and DTE Energy is involved in technical discussions that could lead to some GHG trades. A number of companies also are participating in the World Bank's Prototype Carbon Fund.
Last May, Entergy promised to hold emissions to year 2000 levels through 2005, and, in the meantime, develop a target that would include additional reductions to help combat climate change. The company established a $25 million fund with the aim of achieving 80% of its targeted reductions within its own operations.
Marty Smith, director of environmental policy, said Entergy is projecting a 1.35 million/tonne reduction in CO2 over the 5-year period. The company has identified 26 internal reduction projects at its non-nuclear power plants and 12 external projects that will include offsets. Smith estimated these will result in just under 900,000 tonnes of CO2 equivalent reductions.
Retiring credits
As part of the external program, Smith said Entergy recently bought credits from a Denmark company and retired them, taking 10,000/tonnes of CO2 off the market. Other contracts are still in negotiations.
"We are trying to do as many projects as we can to learn," Smith said. The company also has participated in carbon sequestration programs, renewable projects, and others. Sequestration involves using large areas of ocean or land to store, capture, or reuse carbon emissions. Smith said it is leveraging the $3 million allocated to external programs for the widest exposure.
"There are a lot of opportunities," he said. "I get e-mails and calls every day. We want to try to do a little of everything." Because each transaction is unique, transaction costs tend to be high. "That is why we favor a trading program," Smith said, with standard units for credits.
Costs are running from $2 to several hundred dollars per tonne, Smith said, depending on the source. Solar projects, for example, are considerably more expensive than sequestration projects. "We wanted a variety within our portfolio," Smith said. "We have looked for projects under $10/tonne. But we have others that cost more because we wanted to try it."
BC Hydro issued a request for proposal in January to offset 5.5 million tonnes of GHG emissions from two proposed gas-fired electric generating plants on Vancouver Island. Canada's third largest electric utility has committed to offsetting 50% of the increase in GHG emissions at the plants through 2010.
Since then, the "phone has been ringing off the hook" with people expressing interest, said John Duffy, BC Hydro environmental coordinator. The big hydroelectric generator got its feet wet assembling a 33,000-tonne transaction in 2000. BC Hydro bought gas offsets from the Port Mann landfill in Surrey, BC, with delivery scheduled over 14 years. Putting deals together remains a challenge, Duffy said, because the commodity is new and potential players require education.
Quality of the deal, the technology involved, its location, credibility, transaction costs, and volume determine the price, Duffy said. BC Hydro expects to recover its costs through its rate base. Most buyers and sellers said they would use a third party to audit and verify results.
Detroit Edison Co., the utility unit of Chicago's DTE Energy Co., is involved in technical discussions for the design phase of a voluntary pilot GHG emissions trading program under the auspices of the Chicago Climate Exchange. The organization, which proposes to lower emissions 5% by 2005 from 1999 levels, also has lined up industrial firms and banks to participate in the initial design phase.
"We are keeping an eye on the greenhouse gas market," said Mike Rodenberg, regulatory and compliance supervisor at the Midwest utility, which has participated in tree planting, carbon sequestration, and landfill gas recovery projects. Rodenberg said the GHG emissions market is presently more appealing to companies that operate globally, and with early demonstration trade, it's difficult to tell if they represent true market prices.
Because Entergy owns electric generation in the UK, Smith said the company is "seriously" interested in the development of the emissions market there and in Europe. But the company is not going to invest a "zillion dollars" there, Smith said. Participation will give the company a chance to make its views known as market rules are established.
Emission auctions are scheduled later this month in the UK. Energy companies signing on included BP PLC, Royal Dutch/Shell Corp., and TotalFinaElf SA, but banks, supermarkets, and British Airways were also among the first certified participants. Under the voluntary program, the UK government set aside $310 million to encourage participation in the new emissions market.
Companies can volunteer to a set GHG emissions reduction target in 2002-06 and receive a government payment under the so-called direct entry route. Participating companies will bid in their reduction proposals and trading is set to begin in April. Successful companies will have to deliver these emissions reductions in five equal amounts to receive their incentive payments and allowance reductions.
Shareholders in the World Bank's $180 million prototype carbon fund are interested in the UK developments because they need to know their earned credits can be used against obligations they have to reduce emissions, said manager Ken Newcombe. In the case of bank shareholders, they could sell the credits for cash.
Shareholders get a pro rata share of emission reductions from projects in which the fund invests.
To qualify for credits, projects must contribute to sustainable development in a host country. Canada, Finland, Japan, the Netherlands, Sweden, and Norway have invested in the fund. Some 17 companies are investors, including Norway's Statoil ASA; BP; Germany's Deutsche Bank and power company RWE; and Japanese power companies Chubu, Chugoku, Kyushu, Shikoku, Tohoku, and Tokyo.
The fund is investing primarily in renewable energy technologies such as wind, small hydro, and biomass energy technology. Newcombe said 30 projects have been cleared for carbon purchase agreements. In January Statoil submitted its first application for credits.