Monday, October 20, 2008

Carbon credit gravy train

You can put even money down that anytime a program as complicated as the carbon credit trading system is put into place, there will be a number of unintended consequences and ways that it can be exploited. Oftentimes the exploiters aren't skirting the rules or doing anything illegal. They're simply taking advantge of flaws in the design and/or execution of the program.

The future of carbon credit trading may hinge on the willingness and ability of those in charge to preserve the program's integrity by revising its design as flaws are discovered. Hopefully there won't be too many. (GW)

Pollution Credits Let Dumps Double Dip

Landfills Find New Revenue in Trading System Meant to Curb Greenhouse Emissions

By Jeffrey Ball
Wall Street Journal
October 20, 2008

CAPE MAY COUNTY, N.J. -- America's garbage dumps are reaping a windfall from the fight against global warming. But their payday might not be doing much to reduce greenhouse-gas emissions.

For more than a decade, the landfill here has made extra profit simply by collecting methane given off by rotting trash, and selling it as fuel. Last year, the landfill learned that doing this also qualified it to earn hundreds of thousands of dollars via a new program that pays companies to cut their greenhouse-gas emissions.

Eliminating methane lets dumps sell "carbon credits" to environmentally conscious people and companies. The long-term goal of trading credits -- basically, vouchers representing reductions in carbon dioxide and other greenhouse gases -- is to reduce global pollution by encouraging others to cut emissions when the buyers of the credits can't or won't cut their own.

Concerns are mounting about projects that earn carbon credits for business practices they've been doing anyway. (Oct. 20)

"It seemed a little suspicious that we could get money for doing nothing," says Charles Norkis, executive director of the Cape May County Municipal Utilities Authority, which has raised $427,475 selling credits since February, or 3% of the authority's projected solid-waste revenue for the year.

The sale of credits by these landfills undermines a premise of the global fight against climate change. The credit system was designed to encourage pollution cuts that wouldn't have happened without a financial incentive. But the credits aren't helping the environment if they're merely providing extra profit for cleanups already made. And dumps already have an incentive to capture methane because selling it can be profitable.

The biggest carbon-credit market in the U.S. is the Chicago Climate Exchange. It's an experiment in which polluting companies are trying to develop an inexpensive way to comply with limits on greenhouse-gas emissions that they expect the government to impose. The companies promise to cut emissions partly by retooling their facilities, and partly -- and often more cheaply -- by buying extra credits representing reductions made at landfills or other outside sources.

Over the past two years, landfills from Pennsylvania to North Dakota have started selling extra credits on the Chicago exchange to profit from methane they were capturing anyway.

Selling credits is "gravy to us," says Katherine Vesey, comptroller of the utility authority in Atlantic County, N.J., which was profitably capturing methane for two years before it started selling credits on the Chicago exchange.

The majority of the emission cuts reported by the Chicago Climate Exchange come from member companies' own facilities -- energy-efficiency improvements at factories, for instance. Only a small slice of the reported emission cuts come from outside projects such as landfills, the exchange says.

But the exchange acknowledges that on some of those outside projects, it is authorizing the sale of credits for cleanups that had been performed anyway. Richard Sandor, the exchange's chairman, says that doing so rewards "early action" and encourages other landfills to capture methane too.

Mr. Sandor says the exchange's main goal is to help develop a commodity that has financial value under any possible future U.S. law that to regulates greenhouse-gas emissions. The debate over whether or not a polluter would have cut its greenhouse-gas emissions without the financial incentive of credit sales is "quite interesting, but that's not my business," Mr. Sandor says. "I'm running a for-profit company."

The sale of credits is tied to rising interest among corporations and individuals in reducing their "carbon footprints," or the environmental impact of their daily activities. The U.S. carbon-credit trade more than doubled in value last year, to $131 million.

Outside credits from landfills represent only about 1% of the total emission cuts reported by the Chicago exchange. However, they point to growing questions about the environmental legitimacy of the broader carbon-credit trade. The federal government is joining the scrutiny. Last month, the Government Accountability Office, an investigative arm of Congress, concluded that the trade offers "limited assurance of credibility" that carbon credits represent real reductions in pollution.

The Federal Trade Commission also is examining whether the marketing is deceptive -- in particular, whether credits really represent emission cuts that wouldn't otherwise have happened. With a tangible product, say, an apple, a buyer can easily judge a seller's claims that it's "crisp and juicy and red," says James Kohm, associate director of the FTC's enforcement division. Intangible products, such as pollution credits, "have a greater potential for deception."

Each credit represents one ton of carbon dioxide, or an equally potent amount of other greenhouse gases, prevented from being released. Currently, a credit sells for about $2 on the Chicago exchange.

There is no single organization policing the sale or environmental soundness of credits in the U.S. In addition to the Chicago Climate Exchange, other organizations include the state-founded California Climate Action Registry and the Regional Greenhouse Gas Initiative, a program that's set to impose emission limits on power plants in 10 Northeastern states starting Jan. 1. Each organization has its own rules.

By contrast, most other industrialized countries have a more regulated system. The Kyoto Protocol, a 1997 agreement to curb greenhouse-gas emissions, created a global market in which companies in industrialized nations are required to cut their emissions over time. Those cuts can be achieved, in part, by buying credits from companies that reduce emissions. The U.S. didn't ratify Kyoto.

The global market is policed by the United Nations. A U.N. board reviews potential carbon-credit projects in an attempt to determine whether they're providing pollution cuts that wouldn't otherwise have occurred.

Both major presidential candidates, Sen. Barack Obama and Sen. John McCain, say they support imposing a mandatory limit on U.S. greenhouse-gas emissions. Concerns about carbon credits have big implications for how much such a limit would cost.

That system would likely follow the so-called cap-and-trade model: The government would cap the amount of greenhouse gas companies could emit, and companies could meet the caps by cutting their own pollution or in part by trading in credits representing cuts elsewhere.

Now, a fight is erupting on Capitol Hill over how much latitude any cap-and-trade system should give companies to buy credits. Big polluters, particularly electricity producers, are lobbying for wide latitude, because credits can be a cheaper way to comply while they work on retooling their operations. Some members of Congress, questioning the credits' legitimacy, are pushing back.

Meantime, it is institutions like the Chicago Climate Exchange that are testing various ways to identify the middle ground. Under the Chicago exchange's rules, not all landfills qualify to sell credits. Larger landfills are ineligible because they're already required by federal law to capture their gas for air-pollution reasons. But that leaves hundreds of smaller U.S. landfills eligible, according to Environmental Protection Agency estimates.

The first landfill to join the Chicago exchange is in Lancaster County, Pa., about an hour's drive west of Philadelphia. The Lancaster County Solid Waste Management Authority spent about $1.5 million to install machinery back in 2005 to capture methane instead of letting it escape into the air. It makes about $50,000 a year selling the gas to a local power company. The power company uses some of it to generate steam for the Turkey Hill Dairy, a big ice-cream maker nearby. It uses the rest to make electricity.

The money the authority earns from selling gas is a tiny slice of its $55 million yearly budget. The authority never intended to make money on the project, says James Warner, its executive director.

In June 2006, Mr. Warner was attending a trash-industry conference in Nashville when he came upon a booth for the Chicago Climate Exchange. There, Mr. Warner learned that his landfill also qualified to sell carbon credits.

"Long story short, it was like, 'Holy s -- !'" Mr. Warner says.

The Chicago exchange accepts pollution credits from landfills that began capturing methane as far back as 1999, four years before the exchange began trading credits.

Mr. Sandor of the Chicago exchange predicts the federal government will settle on similar rules. That means companies that buy credits on the Chicago exchange today stand a good chance of being able to use them to comply with any future federal emissions rules.

[Patchwork of Prices]

Other credit-trading programs have slightly tougher rules than the Chicago exchange. For instance, the California program lets landfills sell credits based on methane-capture systems installed only since 2001, which gives its credits more "credibility," says Gary Gero of the California registry. Its credits sell on average for more than those on the Chicago exchange.

Among the companies buying credits on the Chicago exchange is American Electric Power Co., an Ohio-based electricity producer that's one of the largest U.S. greenhouse-gas emitters.

Bruce Braine, an AEP executive who sits on the Chicago exchange's board, says he views the exchange's rules as rigorous. But he acknowledges that it's often unclear whether or not the credits actually represent new pollution reductions.

That judgment will only get tougher, he says. "In most of the cases going forward, you're not going to know whether they would have" installed equipment to curb emissions even without the financial incentive from selling credits.

Another buyer of credits on the Chicago exchange is Fintura Corp., an Atlanta company that designs specialty credit cards. Last year, Fintura, working with MetaBank, a unit of Meta Financial Group Inc., launched the GreenPay MasterCard to appeal to environmentally conscious customers. For every dollar spent using the card, Fintura buys a fraction of a carbon credit.

Like most Chicago-exchange buyers, Fintura buys its credits without knowing their specific origin. Andrew Mathieson, Fintura's chief executive, knows landfills produce some credits, but trusts the Chicago exchange as "one of the best sources out there" for credits in the U.S.

[Cash for Carbon]

Told that some landfills are selling credits on the Chicago exchange for methane-collection equipment they had installed already, Mr. Mathieson says that if "all of the credits I'm buying are that, would I have the same degree of comfort? I would not."

MetaBank, based in Storm Lake, Iowa, declined to comment.

After coming across the Chicago exchange at the trash conference, Mr. Warner told his staff in Lancaster to apply for selling credits. In October 2006, it made its first carbon-credit sale, netting $26,600 after paying $11,900 in fees and commissions to the exchange.

Including that initial trade, Lancaster County has so far made about $320,727 selling credits on the Chicago exchange. It's as if, Mr. Warner says, "I looked under a rock and found a couple hundred thousand bucks."

Mr. Warner has encouraged other landfill executives to join the credit program. Among them: Michael Pavelek II at a landfill in Lebanon County, Pa., about an hour's drive from Lancaster.

The Greater Lebanon Refuse Authority had installed a methane-capture system a quarter-century ago. In 2006, after the tip from Mr. Warner, Mr. Pavelek signed his landfill up for the Chicago exchange. The Lebanon County dump has since made about $125,000 selling carbon credits. It also sells its gas to a local power company.

Now, though, Mr. Pavelek fears the easy money could soon end. Pennsylvania regulators have discussed requiring even small landfills to capture their methane. But, under the Chicago exchange's rules, landfills that are required by law to capture methane aren't permitted to sell credits.

So Mr. Pavelek is now shopping for an authority with looser guidelines that will still accept his credits if Pennsylvania law changes. "We're just trying to get credit for whatever we can while it's available," he says.


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