By Roy Belden and Katherine Wich

If a mandatory greenhouse gas reduction program is ever implemented in the United States, carbon sinks will be an important part of the compliance equation for US companies.

The Bush administration is talking at the moment only about voluntary reductions.  However, a number of US states are taking action on their own — without waiting for the federal government — to require power plants and factories to reduce their greenhouse gas emissions.

Greenhouse gases include carbon dioxide, or CO2, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride.  Reductions in these greenhouse gases are generally measured in “CO2 equivalents.” CO2 is the largest source of greenhouse gas emissions and accounts for approximately 83% of the carbon dioxide equivalent emissions.

What Are Carbon Sinks?

A carbon sink is a forest or other vegetation that absorbs the CO2 emitted by power plants, factories, automobiles and the other machinery that uses combustion to power itself.  Carbon sinks exist in a natural state.  They can also be created as a way of reducing CO2 emissions, like a forest planted in Guatemala to offset anticipated emissions from a new power plant under construction in Florida.

Plants extract carbon dioxide from the atmosphere through photosynthesis, converting it to carbon, storing it in the form of roots, stems, trunks, branches, soil, or foliage, and releasing the oxygen back into the atmosphere.  Examples of naturally-occurring carbon sinks include forests, plants, cropland, grazing land, peat and permafrost.  The term “carbon sinks” has also been expanded to include geologic formations, ocean water and carbonate deposits in the deep ocean where the carbon is stored under pressure and is prevented from being released into the atmosphere.

If one wanted to create more carbon sinks, the most cost-effective way would be to plant new forests.  Costs to plant forests to offset greenhouse gas emissions are generally in the range of $1 to $2 for each ton of CO2 sequestered.  Trees on average are about 25% carbon.  The amount of carbon that can be sequestered depends on the type of tree and the age of the tree.  For example, a large sugar maple is capable of absorbing more than 450 pounds a year of CO2.  While there are ongoing studies into other potential technologies to remove CO2 from power plant emissions, including an amine-based adsorption process, integrated gasification and a high-pressure decarbonization process, these other technologies have not yet been proven to be cost effective.

Planting trees can be a contentious issue in some communities.  Local ecosystems come under stress if fast-growing “tree farms” are seeded instead of trees indigenous to the environment. The overall effectiveness of forests as carbon sinks is also difficult to measure.  Carbon storage projections vary depending on the methodologies used.

A US Environmental Protection Agency draft report entitled “US Inventory of US Greenhouse Gas Emissions and sinks: 1990 - 2002” says that US forests and farmlands offset about 10% of total US CO2 emissions in 2002.  Overall, in 2002, US greenhouse gas emissions were approximately 6,934 million metric tons of carbon dioxide equivalents, which is about 13% above the level in 1990.

Private Initiatives

In the last several years, several US power companies have planted thousands of acres of trees and spent money on other forms of carbon sinks in an effort to offset carbon from combustion processes.  These companies have entered private-public partnerships to promote carbon sequestration projects not only in the US, but also in developing countries.  The companies include AES, Duke Energy, DTE Energy, American Electric Power, Entergy, Cinergy and British Petroleum.  A large number of power companies have also participated in joint initiatives with environmental groups, such as the Nature Conservancy, to organize forestry programs.

Power companies have sponsored numerous carbon sequestration efforts.  For example, AES planted forests in Guatemala and Paraguay to offset CO2 emissions from new power plants.  DTE Energy, Cinergy and Wisconsin Energy Corporation bought and preserved sub-tropical forest land in Belize that was in danger of being stripped bare by developers.  The Belize effort is expected to sequester approximately 2.4 million metric tons of carbon over the next 40 years.  American Electric Power is a founding member of PowerTree Carbon Company, LLC, a carbon sequestration initiative among power companies to create reforestation projects in Arkansas, Mississippi and Louisiana.  More than 40 utilities created another reforestation initiative called UtiliTree Carbon Company to create eight domestic and international forestry programs.  Many afforestation and reforestation projects have been targeted for warmer, tropical climates where trees can grow faster, such as in Central and South America and Australia.

The power industry is also partnering with other high greenhouse gas emission industries like landfills, farming and logging to promote more environmentally-conscious business practices.  DTE Energy, Cinergy and Entergy collect the methane that would otherwise be released from landfills and abandoned coal mines and use it as a fuel to generate electricity.  Power companies have also purchased greenhouse gas emission reduction credits that are created when local farmers use minimum-till and no-till farming practices.  These practices reduce emissions by reducing the amount of carbon dioxide emitted when the soil is tilled.

Private industry is also exploring other forms of carbon sinks.  One form uses technology to capture and inject CO2 into naturally-occurring reservoirs like out-of-service oil or gas fields, deep saline-water reservoirs, sandstone or the deep ocean.  One successful example is the deep saline-water reservoir under the North Sea that stores CO2 extracted from the natural gas stream produced by Statoil.

Power companies are also spending money on research for future carbon sinks and emission reduction techniques.  The US Department of Energy has joined with a number of companies, including American Electric Power, in a research effort to determine whether CO2 can be stripped from the emissions stream at AEP’s Mountaineer power plant and injected into a nearby geological reservoir as a carbon sink.  President Bush has asked Congress for more than $1 billion to spend on building an emission-free coal-fired power plant.  The CO2 would be removed from the emissions stream and stored permanently in a carbon reservoir.  Cinergy has also announced plans to build an integrated gasification combined-cycle plant that will use a coal gasification process.  IGCC technology has shown promise in reducing CO2 emissions compared with traditional coal-fired plants.

Required Reductions

There is nothing in US federal law currently that requires anyone to reduce his greenhouse gas emissions.

However, several US states have decided to take action on their own without waiting for the federal government to act.  Thus, some power plants, factories and other “sources” are already required by state regulation or regional plans to reduce emissions of CO2 and other greenhouse gases.

New York is spearheading an effort by 10 northeastern and mid-Atlantic states to develop a “cap and trade” program to reduce CO2 emissions from power plants.  The participating states are Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont.  They are expected to use the federal acid rain program as a model.  Agreement on a regional program is expected by April 2005.

Maine became the first state in June 2003 to adopt a comprehensive statewide climate change law.  Maine has committed to reduce greenhouse gas emissions to 1990 levels by 2010, and 10% below 1990 levels by 2020.  The Maine program will impose Kyoto-type reduction requirements and will apply to a broad range of facilities, including power plants.

Oregon has set CO2 emission limitations for new natural-gas-fired baseload power plants and non-baseload peaking plants.  Covered plants must meet an emission rate of 0.675 pounds of CO2/kWh of net electric power output.  Companies also have the option of meeting the CO2 standard through offset projects or by paying a fee of $0.85 per short ton of CO2.  Washington state adopted a new law in March 2004 that requires new power plants to offset 20% of the CO2 they emit through mitigation projects.  Companies can either pay a fee of $1.60 per ton of CO2 or finance mitigation projects on their own.

States such as California, Massachusetts, Oregon, New York, New Hampshire, New Jersey, Wisconsin, Illinois, Iowa, Michigan, Maine, Colorado and Washington have each established some form of greenhouse gas emissions registry.  Nebraska, North Dakota, Oklahoma and Wyoming are all working on agricultural reforms to reduce CO2 emissions and increase CO2 sequestration.  Other states, such as Minnesota, Montana and Oregon, have instituted tree planting and forestry programs to foster carbon sequestration efforts.

Kyoto

The Kyoto treaty that was supposed to commit a large number of countries to take concerted action at the international level to reduce greenhouse gas emissions has not yet been implemented.  There are doubts about whether it will ever take effect.

The treaty was negotiated during the Clinton administration, and it set deadlines for reducing greenhouse gas emissions below a 1990 baseline.  The United States signed the treaty in November 1998.  However, the Bush administration rejected it in 2001, citing concerns about the effect of the treaty reductions on the US economy.  The Bush administration also complained that large developing countries, such as China and India, would not be obligated to cut green-house gas emissions under the treaty and criticized the treaty for not fully embracing carbon sequestration as an acceptable method for offsetting greenhouse gas emissions.

If implemented in its current form, the treaty would require the United States to reduce CO2 emissions by 7% below 1990 levels by 2012.

Russia is now the key to implementation of the Kyoto treaty.  The treaty will enter into effect after it has been ratified by 55 or more countries (including both industrialized “Annex I” nations and developing “Annex II” countries) whose combined CO2 emission levels represent at least 55% of the CO2 emissions from Annex I countries in 1990.  As of the end of March 2004, 121 nations had ratified the treaty, and those nations accounted for 44.2% of the 1990 carbon dioxide emissions.  Russia accounts for 17.4% of the emissions, and thus its ratification would put the treaty over the 55% implementation threshold.  The United States accounted for 36.1% of 1990 CO2 emissions.

At present, Russian intentions are in doubt.  A senior aide to the Russian president, Vladimir Putin, said in late 2003 that Russia will not ratify the treaty in its current form because it has similar concerns as the US about how the treaty would affect its economy.  However, President Putin has not yet formally rejected the treaty.  He was just reelected in March.

In December, a subset of the Kyoto negotiators clarified how to quantify CO2 emission reduction credits from carbon sequestration activities.  The group drew up model tables for reporting land use, land-use change and forestry activities undertaken to sequester carbon.  It agreed that a type of carbon sequestration called a “clean development mechanism” project would count toward greenhouse gas emission reduction targets.  Such projects might be sponsored by developed countries in developing countries.

US Voluntary Reductions

In the meantime, the Bush administration is advocating a policy of encouraging US companies to reduce greenhouse gases voluntarily.  A “global climate change initiative” announced by the Bush administration in February 2002 would set a goal of reducing the greenhouse gas intensity of the US economy, as measured against the gross domestic product, by 18% within 10 years.  The goal would be voluntary.  The current US rate of greenhouse gas emissions is 183 metric tons per million dollars of gross domestic product.  Bush would set a goal of reducing this to 151 metric tons.  The administration says that its goal equates to approximately a 4.5% reduction beyond business-as-usual forecasts.

The president also wants Congress to set aside more money for developing science and technology, conservation efforts, renewable fuels and sequestering carbon as part of a long-term strategy.

The plan would also direct the US Department of Energy to improve its voluntary emissions reduction registry and to develop a strategy to ensure that companies are not penalized for registering voluntary emission reductions under any future climate change program.  The Department of Energy recorded 369 carbon sequestration projects in 2001 in 31 states and eight foreign countries.  A total of 7,956,823 metric tons of carbon dioxide are expected to be sequestered from these projects.  The department is currently funding more than 80 active research and development projects involving carbon sequestration.  Many of these projects are focused on new ways to remove CO2 from the emissions of combustion sources and also the potential storage of captured CO2 in geological formations or in the deep ocean.

At least for the near term, the US Congress is not expected to pass legislation requiring mandatory greenhouse gas emission reductions.  The Senate rejected a bill offered by Senators John McCain (R-Arizona) and Joseph Lieberman (D-Connecticut) in October 2003 that would have required power plants and factories to cut back their greenhouse gas emissions to 2000 levels by 2010.  The vote was 43 to 55.

Mandatory Reductions on the Horizon?

Nevertheless, many companies believe that it is only a matter of time before some form of mandatory greenhouse gas emission reductions are in place in the US.  American Electric Power and Cinergy are expected to report to their shareholders later this year on the potential financial risks from future greenhouse gas emission reduction requirements.

Even if the Kyoto treaty is ultimately set aside, there is no going back for the European Union: some form of mandatory greenhouse gas reductions are expected in Europe.  Each of the European Union countries was obligated to submit its national quota allocation plans by the end of March 2004.  The allocation plans are an initial step toward a planned start to trading greenhouse gas emissions credits within the European Union in January 2005.

Some American companies are already taking steps to reduce their emissions or invest in carbon sequestration projects in anticipation of an eventual US program.  It is possible that these early reductions will ultimately be rewarded in any federal greenhouse gas reduction program that is enacted.  Some companies see a public relations benefit from such efforts.  Another factor is shareholder groups that are forcing large publicly-traded companies to cover in their annual reports what efforts they are making to address global warming.  More than 25 global-warming-related shareholder resolutions are pending at companies this year, including at ExxonMobil, Southern, TXU, and ChevronTexaco.

A growing market is developing in the trading of greenhouse gas emission reduction credits.  Emission trading companies such as Natsource, Cantor Fitzgerald and CO2.com already actively trade such credits.  Several industrial companies, financial institutions, and not-for-profit corporations recently joined the Chicago Climate Exchange — known as the “CCX” — which commenced business on October 1, 2003 as an electronic exchange for trading greenhouse gas credits among companies that voluntarily choose to reduce their greenhouse gas emissions.  The CCX has more than 20 members, including American Electric Power, the Ford Motor Company and International Paper.  Each member has voluntarily committed to reduce its greenhouse gas emissions by 4% in 2006 from a baseline emission level that is tied to CO2 emissions during the period 1998 to 2001.

The CCX held its first auction of CO2 emission allowances last fall consisting of 100,000 metric tons of 2003 vintage CO2 allowances and 25,000 metric tons of 2005 vintage CO2 allowances.  The average successful bid was $0.98 per metric ton CO2 for 2003 allowances and $0.84 per metric ton CO2 for 2005 allowances.