Clearing the Air

Prudent ethanol producers have shown an interest in becoming generators of carbon credits and are leading the way for others to follow despite the fact that carbon trading the United State is done on a voluntary basis. This is the first of EPM's two-part look at the current U.S. market and what might be in store for 2009.
By Kris Bevill | October 06, 2008
The voluntary carbon market in the United States has been functioning efficiently for several years with little involvement from biofuels producers. Time might be of the essence, however, for companies that are tossing around the idea of entering the market. All signs point to a future that includes federally mandated emissions regulations. Early market entry could result in several benefits, including a chance to help shape future mandates and benefits. Generally speaking, corn ethanol facilities are tremendous energy consumers and are currently unable to generate carbon credits without modifying their operations. For producers looking to become more energy efficient, the carbon market offers the perfect reason to install the equipment and/or technology necessary to reduce energy input. It could save producers money in operating costs, help change the industry's "high energy input" image and give them the opportunity to become leaders in the carbon market.

About Carbon Credits
Carbon markets are commodity-based markets that exist for the buying and selling of carbon credits. The term "carbon credit" can be misleading because it's not just carbon dioxide that's traded, but rather all pollutants that increase greenhouse gas (GHG) emissions. Included in that category are carbon dioxide, methane, nitrous oxide and a list of fluorinated gases.

GHGs are assigned a number representing their global warming potential (GWP). According to the U.S. EPA, GWP can be defined as "the ratio of heat trapped by one unit mass of the greenhouse gas to that of one unit mass of carbon dioxide over a specified time period." Therefore emissions are traded on a carbon dioxide equivalent, which leads to the general term "carbon credit." For example, carbon dioxide has been determined to have a GWP of 1 while methane's GWP is 21. Therefore one ton of methane emissions reduced equals 21 carbon credits. Nitrous oxide, a major component of corn production, has a GWP of 310.

Several emissions trading schemes have been developed to reduce the effects of global warming. Variations include regulatory systems, similar to what is being used in Europe, and voluntary systems, currently at play in the United States.

The European Union's emissions trading scheme is the largest carbon market in the world. It's a cap-and-trade-system where industrial companies are required to limit GHG emissions to certain levels every year or buy credits from other lesser emitters to make up the difference. The EU's system may be the largest but it's not the oldest. Although it's been in operation since 2005, the U.K. had an emissions trading scheme in place prior to that. The European Union scheme follows the framework for GHG reductions set forth in the Kyoto Protocol.

In the meantime, other countries have recently announced plans to develop mandatory emissions reduction standards including Japan, Australia and New Zealand. The province of Alberta, Canada, has implemented a regulatory system and because of the oil drilling that is occurring in the tar sands in that province, carbon credits are in high demand.
In contrast, the United States' carbon market is a voluntary system where a multitude of private trades are conducted for a variety of corporate and personal objectives.

Trading on the U.S. Carbon Market
There are only a couple of programs in the United States designed to entice businesses to reduce their carbon emissions. Carbon offset programs include the California Climate Action Registry and the Regional Greenhouse Gas Initiative. CCAR is a nonprofit GHG registry established by California as a way to promote early actions taken by members to reduce emissions. Members agree to measure, verify and report GHG emissions and in exchange the state will ensure those members receive adequate consideration for being early actors in the event of future state or federal regulations. As with many other California-based environmental programs, it serves as a leader among rule makers. Protocols set forth by CCAR are often noted by other carbon offset organizations in the country.

The RGGI is a conjunctive effort among 10 Northeastern states—Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont—to mandate a cap on current emissions, and it calls for a 10 percent reduction in emissions by 2018. It is the first mandatory, market-based carbon dioxide emissions reduction program in the United States, however it was created only to regulate power plants and so does not yet hold relevancy to ethanol producers. Participating states created a model to serve as the basis for each state's individual regulations.

And then there is the voluntary trading market, which is led by the Chicago Climate Exchange (CCX). Established by Richard Sandor in 2003, the CCX is the world's first and North America's only voluntary, legally binding integrated trading system to reduce GHG emissions. It was formed to provide structure, transparency and rules to the carbon market.

Members of the CCX agree to an aggregate reduction of GHG emissions by 6 percent between 2000 and 2010. Simply put, the membership as a whole must reduce its emissions by that percentage. Some individual companies may successfully reduce emissions by more than 6 percent and others aren't so successful—that is where the trading of credits comes into play.

The first step for a prospective carbon market member is to have its company analyzed to determine its baseline, which is the amount of GHGs determined to be emitted by that company in 2000. The baseline serves as the starting point for each company to work from when attempting to meet reduction goals and also determines that company's monetary membership fee.

Once a company becomes a member of the exchange, it can begin generating, selling or buying carbon credits. Members who reduce emissions by more than the annual requirement generate credits which can be monetized into Carbon Financial Instrument contracts, each one representing the equivalent of 100 metric tons of carbon dioxide emissions reductions, and can be sold on the exchange. Members who fail to meet reduction requirements must buy credits from another exchange member or complete an approved reduction project to negate the emissions being put forth by the company.

Membership compliance check-ups and verifications are conducted annually by the Financial Industry Regulatory Authority. CCX employs demanding annual independent verification methods that have yielded 100 percent membership compliance with its annual emission goals.

At press time, the exchange was on track to trade between 80 million and 100 million tons worth of CFIs, worth an estimated $300 million to $400 million in 2008. At that time, spot pricing for CFIs were firm at $2.50, futures were a bit higher and ranged from $2.70 to $2.80 per contract.

Industry Trendsetters
When the CCX was launched in 2003 there were 13 members. Today, there are more than 400 members including the Renewable Fuels Association, Ford Motor Co., Cargill Inc., Monsanto Co., and a multitude of various municipalities, universities and state governments. Each member has its own reason for signing up. Some companies see the value in having an energy audit conducted at their facility and plan to bank it for future use. Other companies join as a way to remain in good standing with their shareholders. For many, as cliché as it sounds, company leaders believe climate change is a major problem and that it's part of their corporate responsibility to take part in reducing GHG emissions.

Regardless of their reasons for joining, one common theme shared among members of the exchange is that they believe it is in their best interest to get a jump start on what they perceive will be a requirement in the future, and to lead by example.

One can't talk about carbon trading in the ethanol industry without mentioning Corn Plus LLLP. The Winnebago, Minn., company made history earlier this year when it became the first biofuel producer to sell carbon credits on the CCX. The 44 MMgy ethanol plant joined the exchange in August 2007, after it had already installed a fluidized bed boiler to convert leftover corn syrup into energy, thus reducing the facility's need for natural gas by 52 percent. Plant manager Keith Kor says Corn Plus has always been proactive in finding ways to reduce its operating costs. They began researching the fluidized bed boiler back in 2003 as a way to reduce energy costs as natural gas was about $4 per million Btu (MMBtu). The technology has certainly paid off as natural gas prices have since increased to $7.50 to $8 per MMBtu.

The idea of generating carbon credits was an afterthought. After installing the bed, Kor began conferring with Carbon Green LLC, a carbon market consulting and trading firm and realized that Corn Plus could turn its energy-saving techniques into a money maker on the carbon market. "That's what got the ball rolling," Kor says.

Corn Plus signed on with Carbon Green and began the process of becoming a CCX member. According to Kor, the company paid a $25,000 membership fee to join the CCX and spent many months reviewing years of natural gas intake and other records as part of the analysis, but he says it was worth it. The entire process took nine months, according to Carbon Green president Jim Murphy, a time period he hopes to reduce as more ethanol producers sign up with his company.

Kor says Corn Plus will generate 40,000 tons of carbon credits this year and looks to do about the same in 2009. The credits the company sold in March went for a bargain price of $6 per ton. Kor expects that price will continue to rise as more interest is paid to the possibility of a federally-mandated market. Corn Plus plans to hold its credits until the price goes up. "If you look at the price of carbon credits over in Europe, they're at $20 or $30 per ton," he says, hinting at the potential of things to come in the United States.

Benson, Minn.-based Chippewa Valley Ethanol Co. signed on with Carbon Green and its partner, Environmental Credit Corp., in June and is in the process of becoming a carbon credit generator on the CCX. While the end result will be similar, CVEC's method of reduction is different from the method used by Corn Plus. CVEC chose to install a biomass gasification system, which will burn corn stover, corncobs and other biomass to offset the plant's natural gas usage. Bill Lee, plant manager, says they became interested in a biomass gasification system for multiple reasons, only one of which was to fit with what they perceive is a move toward a federally regulated carbon emission environment. Lee says the first priority was to reduce the plant's second-highest input cost—energy. The gasification system has applicability in cellulosic ethanol production, which could serve the facility well in the future. And finally, Lee says the system fit with the plant's overall desire to move toward a fully renewable process. "More ethanol plants ought to be moving in this direction," Lee says.

CVEC is preparing to become a carbon credit generator, according to Lee. They began working with Carbon Green in late summer and expect to complete the auditing process and become a member of the CCX within a year. Lee says aside from the investment for new technology to consume less energy at the plant, the front-end investment for a plant to become involved in the carbon market is low. Although there is money to be made, selling carbon credits in the current market is modest. But companies like CVEC and Corn Plus aren't looking for an instant return on their investment. "We're looking forward to what lies beyond the voluntary market in this country," Lee says. "A corn ethanol producer needs to be doing something to actually reduce [energy input]. They either need to make a dramatic improvement in efficiency and/or they actually have to start displacing fossil energy inputs with something of a lower carbon nature."

Corn Plus has found a way to utilize its corn syrup and CVEC has chosen to focus on biomass gasification, but there are many other methods to reduce input costs and produce carbon credits, including landfill gas utilization and anaerobic digestion. It is up to each plant to choose the method that works best for that particular facility. One thing is certain—energy input costs will only increase and ethanol plants will continue to need to find ways of generating revenue. For many the solution might lead to the same place—the U.S. carbon market.

Kris Bevill is an Ethanol Producer Magazine staff writer. Reach her at kbevill@bbiinternational.com or (701) 373-8044.