Gleaning profit from pollution
Pollution can pay—if you own a forest soaking up carbon dioxide from the atmosphere or you use a renewable source of energy, such as solar or wind power.
A system is developing that rewards companies and organizations that engage in environmentally friendly practices by allowing them to receive “credits” that can be sold or traded to companies that expect to exceed limits on greenhouse gas emissions, primarily carbon dioxide released by burning coal or gas.
The formula for selling “carbon credits” to polluters is a tricky one, but a local brokering company has figured it out. Tatanka Resources is one of about 50 companies recognized as carbon credit “aggregators” by a division of the Chicago Board of Trade called the Chicago Climate Exchange, and it’s the only one in Missouri.
The system could get a huge boost if Congress passes pending legislation that aims to reduce greenhouse gas emissions and global warming. One bill, sponsored by powerful senators John Warner and Joe Lieberman, is called a “cap-and-trade” initiative.
In general terms, the system sets a cap on the amount of carbon dioxide that electric, manufacturing and transportation companies are allowed to emit. Participants who save energy, reduce gases or store carbon can trade their credits to companies expecting to exceed their allowances.
Tatanka’s partners are Steve Mahfood of Hartsburg, who served as director of the Missouri Department of Natural Resources under former governors Mel Carnahan and Bob Holden; Mike Crist of Columbia, an economic development specialist; and Joe King, a former state energy director in Kansas. They formed the limited liability company in January 2007 and expect to make the first sale of carbon rights in January or February 2008, Crist and Mahfood said. The deal would involve roughly 30,000 acres of land and close to 70 landowners in Missouri and eight other states.
“We’ve never had this kind of economic opportunity on the farm,” said Hank Stelzer, a state forestry extension specialist based at the University of Missouri-Columbia, about the potential income through carbon credit sales on the Chicago Climate Exchange. “It’s almost like a part of a new [federal] farm bill.”
The Climate Exchange
The genesis of the Chicago exchange and Tatanka really dates from the late 1980s, when the federal government took steps to reduce acid rain.
In an agreement with Canada to begin protecting eastern parts of North America, the United States originally intended to remove 10 million tons of sulfur dioxide from the air each year by 2010. By 2006, the U.S. had met its goal, and Canada had exceeded its pledge.
The government used a market-based cap-and-trade system that allowed companies exceeding their reduction targets to sell those excesses to firms still emitting too many pollutants. In effect, companies failing to follow national environmental policies paid fines.
By the 1990s, though, the United States had reached the end of its commitment to environmental improvement via international agreements. The Clinton administration argued successfully to get a similar cap-and-trade system in the Kyoto Protocol that attempted to control forces believed to be causing global warming. President Bill Clinton signed it but never submitted it to the Senate for ratification. The Kyoto Protocol would have required the U.S. to reduce its production of six greenhouse gases by 7 percent by 2012. (Australia signed on earlier this month, leaving the United States as the only developed nation that has not approved the Kyoto protocol.)
In 2003, Richard Sandor, an economist with Burnham Drexel Lambert, launched the Chicago Climate Exchange (CCX). He adapted the same cap-and-trade plan to global warming that had relieved the burden of acid rain on the environment.
With no government action to force reduction in greenhouse gases, though, Sandor substituted a voluntary contract in which members agreed to reduce their greenhouse gas emissions. Based on 1998-2001 figures, members of CCX agree to reduce their carbon dioxide emissions by 1 percent a year through 2010.
The CCX members exceeding their goals for emission reduction could sell their carbon credits to others.
CCX operates under the regulations of the Chicago Board of Trade, where Sandor earlier served as chief economist, and looks to aggregators to assemble smaller companies and farms that save energy, reduce gases and store carbon.
Major companies—usually multinationals such as IBM, Ford and DuPont—are included among CCX’s 300-plus members, and their use of the CCX is growing rapidly. In 2006, the members sold 30 million tons of carbon credits. In 2007, they had topped that mark by July.
Missouri so far has limited activity in the exchange, although the City of Columbia has carbon rights gained from its purchase of electricity through Associated Electric Cooperative, a CCX member, from Wind Capital Group’s wind farm near the Iowa border. Connie Kacprowicz, spokeswoman for the Columbia Water & Light Department, said the city likely will simply hold the rights to meet its self-imposed renewable energy requirements, although the Columbia City Council might sell credits later.
Because the U.S. did not ratify the Kyoto Protocol, no one in this country has the need to buy credits. The current buyers are companies committed to environmental improvement and individuals, such as former vice president Al Gore, who invest in carbon credits to offset their personal use of energy from fossil fuels, their “carbon footprint.” Considering the political inclinations in area business and agricultural communities, “I don’t bring up Al Gore,” Mahfood said with a laugh. “I bring up efficiency and energy security, fewer unknowns to a company.”
At this time, the credits at CCX have limited value, about $2 a ton, compared with $30 a ton for European participants.
Looking for an answer in our trees
Mahfood and Crist have focused their initial efforts on forestry, specifically reforestation and carbon management services. “We’re in the forefront nationally on forestry,” Crist said. “We’re one of the leaders.”
Tatanka signed up Dogwood Carbon, a Columbia company organized by Bryce Oates and Jake Davis, to recruit and work with farmers who could document planting trees since 1990.
Winrock International recently started sending its representatives to farms that Tatanka and Dogwood have enrolled and will deliver an estimation of expected tonnage by site. Winrock is a branch of the foundation founded by former Arkansas Gov. Winthrop Rockefeller that has been active in forestation projects worldwide for more than three decades. Tatanka then must hire a consultant to verify Winrock’s work.
The initial sales could produce unusually hefty rewards for landowners. The first year could produce annual payments on credits earned between 2003 and 2007, if the woods have existed that long.
Landowners need to keep 20 percent of the rights sale in reserve to cover possible losses from fire and other threats. They’re required to sign a contract to keep the land in forest until 2011. If they log it, the carbon credits disappear and must be replaced.
That 20 percent reserve remains the property of the landowner and may be worth more when sold in 2011 because the value of the carbon credits is expected to have increased.
Tatanka and Dogwood will share a commission of 10 percent of the overall sale. That compares with the 30 to 40 percent often paid to broker-aggregators who trade projects in the Regional Greenhouse Gas Initiative, a separate project operated by seven northeastern and middle-Atlantic states, and in the California system.
Tatanka’s upfront costs on the arrangement are substantial—about $100,000 out of pocket—as the company gathers and pays for consultants, lawyers and help. Much of the cost is occurring because Tatanka is working to put in place a system that more accurately will gauge the carbon that is drawn out of the air and stored in the leaves, bark and roots of the trees.
Mahfood expects that Tatanka’s emphasis on primary benefits for the landowner will only increase the company’s appeal as the forestry project spreads.
Crist now is working under a business model that eventually anticipates the company will sell $1 million to $2 million in carbon credits every three months.
Crist anticipates that the CCX soon will adopt standards for grading and approving carbon rights on “native” or “existing” forests, which could open far more extensive segments of Missouri tree lands that are older and even sprouted independently for farmers, particularly in central and southern Missouri.
But if handled improperly, a major expansion could flood the carbon-credit market with so much land that it would undermine the value of carbon credits sold nationwide through the Chicago exchange. All carbon credits for sale are subject to the same price.
“This can be a huge financial impact for small landowners,” Crist said. “It’s a new form of money.”
Stelzer said, “There is a lot of interest out there” in the farm community. “Or I should say there will be a lot of interest as soon as the exchange and the aggregators settle on a definition of a working forest” that allows selling the carbon rights on native forests.
“We are right on the cusp of big things,” Stelzer said, adding that the system could encourage farmers to manage the state’s woodlands, which were clear-cut at the beginning of the 20th century. “Only 10 percent of our forest landowners manage their land now. …They don’t plan even modest improvements.”
Crist estimated that at current pricing, the farmers would get close to $15 per acre of eligible woodlands annually.
The prospect for American standards
The Lieberman-Warner plan that began with a flurry of activity limits its focus to electric, transportation and manufacturing sources of pollution that account for 75 percent of the greenhouse gasses produced in America.
By 2012, those companies would need to produce no more greenhouse gases than they did in 2005. Those emissions would drop to or below the 1990 emissions levels by 2020.
The Lieberman-Warner bill preserves the role of the CCX by allowing companies to sell, buy or trade allowances they need or have earned.
Mahfood’s more than 20 years of government and political experience in environmental affairs includes 13 years as head of the Missouri Environmental Improvement and Energy Resources Authority, a quasi-governmental arm of the DNR.
The Lieberman-Warner plan is one of some 50 bills related to climate change introduced this session, but even though Democrats control both houses now, Mahfood said he doesn’t believe any of the bills will pass this session.
The U.S. Chamber of Commerce and other business advocates support voluntary action to limit carbon dioxide emissions.
Mahfood considers a strong regulatory framework that limits greenhouse gas emissions as necessary for a cap-and-trade system to survive. Otherwise, the country would depend on voluntary buyers for a carbon market that has all but lost its value, and companies would have limited incentive to invest in energy-efficient equipment.
Crist said the partnership has placed its bets on a cap-and-trade system as the likely winner in the long run. Virtually all the American legislation introduced “grandfathers” in the Chicago Climate Exchange credits that already had been sold. But some senators, including presidential candidate Christopher Dodd, still are backing a carbon tax that forces almost every company to pay for the right to emit pollutants.