Engineering News

CO2 Offsets Face Uncertainty
June 04, 2009

U.S. companies that turn to carbon-offset projects to comply with potential federal regulation of greenhouse-gas emissions will be leaning heavily on a nascent market whose rules are still being developed.

A landmark climate change bill proposed by Reps. Henry Waxman, D-Calif., and Edward Markey, D-Mass. would allow industries to use U.S. offset projects to cancel out up to a billion tons of carbon dioxide emissions a year. Industries also could turn to international projects for an additional billion tons in annual offsets.

An offset project reduces emissions of heat-trapping gases through a variety of approaches, from capturing landfill gases to planting forests to soak up carbon dioxide. Offsets are seen as a cheaper way for large emitters to comply with emissions limits, especially early on. For example, controlling emissions from animal waste on a farm is far less costly than trying untested systems to capture and store CO2 from a coal-fired power plant.

But even as Congress moves closer to creating demand for such projects, risks abound for developers and investors. Some warn only a trickle of offsets will be available when proposed curbs start in 2012 because of vast uncertainty around what projects will qualify under a federal cap-and-trade system.

"They've got to give certainty to what can be used as an offset," said Tracy Evans Sr., vice president of reservoir engineering for oil and natural gas producer Denbury Resources Inc. (DNR), at a recent energy conference in New York sponsored by RBC Capital Markets.

Offset projects rely on detailed standards to assure that emissions are being reduced. Offsets have faced criticism over whether they actual result in emission cuts, and if the rules are stringent enough to assure that offsets actually combat climate change. Although the Waxman-Markey bill begins to set rules for offset projects, numerous changes could come as the debate in Congress continues.

That has left investors with a fledgling market to try and speculate on future CO2 emission prices, while companies likely to face curbs struggle to find ways to hedge against the expected costs.

The market for offsets in the U.S. is dominated by specialized deals between developers and investors. An over-the-counter market for credits produced by projects is developing, and the Chicago Climate Futures Exchange has begun to offer futures contracts for credits produced under California's offset standards. Additionally, there also are emission allowances under the Regional Greenhouse Gas Initiative, or RGGI, the nation's only mandatory cap-and-trade program to cut greenhouse gases in 10 northeast states.

"It is still the early days," said Mike Intrator, principal portfolio manager at Natsource LLC, a New York-based asset management and advisory and research service for global environmental markets. "We are only seeing the initial instruments that entities will use to hedge their risk."

Cap, Trade and Offset

The Waxman-Markey bill aims to cut emissions roughly 17% below 2005 levels by 2020, and roughly 80% by midcentury. To accomplish the reductions, the proposal creates a cap-and-trade system, setting limits on emissions, issuing permits that allow companies to pollute consistent with those limits and letting companies trade the permits among themselves.

For emitters, offset projects can eliminate some of the need for allowance permits. Instead of using an allowance or trying to reduce emissions at a facility, a utility or cement producer, for example, can buy offset credits, canceling out some of the CO2 their plants spew out.

But even though demand for offset credits is expected, project development for the U.S. market remains a small industry. The market itself is opaque, making it difficult to determine how many offset projects are waiting in the wings for the likely U.S. system.

Clarity on rules for early entry are critical, since projects take time to develop, said Gary Gero, president of the Climate Action Reserve, an organization created by the state of California to certify offset projects.

The Waxman-Markey bill would allow offset projects created under standards for RGGI and the Climate Action Reserve to qualify ahead of the market's start in 2012. Additional standards could qualify under a process vetted by the Environmental Protection Agency, as long as they're as rigorous as the state programs. A variety of additional certification systems exist.

Additionally, the legislation allows for international credits, potentially tapping into a market that already exists under Europe's CO2 trading system. But whether large volumes of international offset will be available to U.S. industries is unclear, since demand from Europe may be strong.  

Source: Dow Jones Newswires

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