Cash for Carbon

Greenhouse Gas Reduction Has Become a Seller's Market

Can clean money be exchanged for dirty air? That's the premise of an emerging trade in carbon credits, which hold out the tantalizing promise of allowing industries to insulate themselves from greenhouse gas regulations by voluntarily agreeing to pay for “global cooling.”

Emissions trading, the selling of federally recognized “right to pollute” credits from one industry to another, is well-established. But a specific market for carbon dioxide (CO2) reduction is a product of the 1998 Kyoto Accords on global warming, which call for reducing worldwide CO2 emissions to below 1990 levels.

Because some coal-burning utilities lack the technology to reduce emissions to Kyoto levels on their own, they are banking on greenhouse gas trades with farmers, who can “sequester” carbon (absorb it through the land) using such methods as no-till cultivation. That's sent a host of carbon brokers to Iowa, Nebraska and Illinois in search of credit deals.

These carbon trades, though engineered by reputable brokerages, are totally unregulated and there are no guarantees that any government will officially recognize the credits. That hasn't prevented several major players in Canada, Australia, New Zealand, United Kingdom and the European Union from signing contracts.

Unlike the U.S., which still hasn't ratified the Protocol, Canada has agreed to reduce emissions to six percent below 1990 levels by 2008, at a rate of 100 million metric tons per year. That deadline lights a fire under Canadian greenhouse gas producers such as GEMCo, a Vancouver-based consortium of 10 major Canadian utilities, which recently purchased options on 1.4 million acres of Iowa farmland. The deal was handled by Cantor Fitzgerald Environmental Brokerage Services in New York and the money funneled through IGF of Des Moines, the nation's largest crop insurer.

An acre of farmland can sequester an estimated one ton of carbon. GEMCo will pay an average of $1.50 a ton to obtain 2.8 million metric tons of greenhouse gas reduction credits. The deal could eventually exceed $5 million, according to GEMCo, because the credits become more valuable the longer they are held until the year 2008, the deadline in the Protocol. “North American farmlands have the potential to offset a very significant portion of greenhouse gas emissions from this highly industrial continent,” says Aldyen Donnelly, president of GEMCo.

Late last year, Australia set up the first official futures exchange in carbon credit trades and is expected to do an annual $5 billion (U.S.) in transactions. “Trading in carbon credits is a new market for the new 21st century,” said Bob Smith, CEO of States Forest of New South Wales.

In the U.S., regulators are so far keeping hands off the issue because there is no official American involvement in the Kyoto Protocol. “It is a real awkward situation,” says one high Environmental Protection Agency (EPA) official, who prefers anonymity. “They risk a lot. There are assumptions that that these deals will be honored.”

The Washington-based Edison Electric Institute, which represents U.S. utilities, claims that the Kyoto Protocol is “severely flawed.” It points out that the Protocol, which is still being adjusted in worldwide forums, has not yet met the demands of a U.S. Senate resolution insisting that developing nations meet the same six to eight percent C02 reduction by 2008 standard as industrial countries. “The futility of the Kyoto approach is made evident by the fact that the largest developing nation, China, is expected to surpass the U.S. as the single-largest source of greenhouse gas emissions by 2015,” says the Institute, adding that the American taxpayer could be forced to pay hundreds of billions annually.

In testimony submitted to Congress in 1998, the New York-based Environmental Defense reported that a “business as usual” strategy could mean that the U.S. would emit 30 percent more greenhouse gas emissions in 2008 than it did in 1990. Carbon credit programs provide many opportunities, the group said: Livestock farmers could drastically reduce methane emissions, the second-largest category of greenhouse gas; farmers in New England and the Southeast could gain credits from managing forest parcels; and agricultural water rights in the Northwest could be traded to leave more water in rivers, thus generating more hydroelectric power and reducing loads on fossil fuel plants.

Traders are still advocating these deals as the best “market-based solution” to reduce worldwide air pollution. “What is missing right now are the rules and regulations, and that is why there is uncertainty,” says Gary Hart, president of the Emissions Trading Association.

The agreements are definitely a gamble. “Until governmental rules define matters otherwise, greenhouse gas emissions are a figment of parties' contracts,” says Mark Perlis, a Washington, D.C. attorney specializing in environmental law. “Would-be sellers of reductions or credits have no vested entitlement to any benefit under existing law.” Perlis points out there is no U.S. law that even so much as defines greenhouse gas credits.

The uncertainty results in a very volatile market. Australian traders are paying prices that range widely from $10 to $200 a ton. “The numbers are all over the board,” Hart says. “It is very uncertain right now.”

“The GEMCo transaction demonstrates the potential of the marketplace to provide low-cost solutions to address the greenhouse effect,” says Carlton Bartels, managing director at Cantor, the firm that brokered the deal. “The agricultural sector has a tremendous capacity for removing carbon dioxide from the atmosphere and abating the emission of its own greenhouse gases.”

Once a farmer has his land audited, he or she can choose to cash in the carbon emission reduction credits (CERCs) or hold on to them in a procedure similar to a futures call option. Prices escalate as the schedule draws closer to the 2008 deadline.

Greg Lewis, president of CQuest, a Des Moines brokerage that deals in CERCs, said that for each dollar that a utility spends, 55 cents goes to the farmer and the other 45 cents goes for commissions, fees and salaries for brokers, land auditors and engineers who actually visit the farms and verify the CERCs.

Buying and selling CERCS has tremendous potential, Lewis says. “I could probably sell 100 million CERCs to the utility market right now. The atmosphere is one big bowl of soup to which everyone can add or subtract greenhouses gases.” The next step, says Lewis, is to set up an Internet auction system for CERCs.

That may increase the volume of trades, with excellent prospects for reducing worldwide CO2 emissions, but it probably won't satisfy all the concerns of nervous investors.