Greenhouse Gas Credits May Prove A Source Of Financing

Greenhouse Gas Credits May Prove A Source Of Financing

December 01, 1999

Two recent sales of greenhouse gas credits suggest that such credits might serve as a source of financing in future for projects that use landfill gas, manure and other forms of solid waste.

Until recently, the US government offered a subsidy for such projects through the US tax code. It allowed anyone producing “gas from biomass” to claim a so-called section 29 tax credit of 1.052¢ per mmBtu of gas produced. The gas producer had to sell the gas to a third party to qualify for credits. His equipment also had to be in operation by June 1998.

With expiration of section 29 tax credits, project developers have been looking for other enhancements to support financing.

The trades are noteworthy because no green-house gas credits exist yet under US law. The US Department of Energy is simply keeping track of voluntary actions by US companies to reduce greenhouse gas emissions in case Congress decides to reward such actions in the future. This may explain why the trades to date have involved Canadian companies as purchasers of the credits.

The United States committed in the Kyoto protocol in December 1997 to reduce greenhouse gas emissions by at least 7% below 1990 levels by the period 2008 to 2012. The protocol faces stiff opposition in the US Senate, which would need to ratify it before it becomes a binding obligation.

A bill, called the “Credit for Voluntary Actions Act,” that would provide credit for early actions to reduce greenhouse gas emissions has been introduced in both the House (H.R. 2520) and Senate (S. 547). Even though the bill has not been enacted, some investors anticipate that there will be a credit trading system — and they are looking to buy greenhouse gas reductions now for possible future use. In the absence of an existing program, the market is currently applying the basic criteria that govern most other types of saleable air emissions credits in the United States. Under these standards, the emissions reductions will have to be both verifiable and voluntary in the sense that they were not required by federal or state regulation or local law.

One concern with the availability of greenhouse gas credits from landfill projects is whether the reductions can be considered voluntary. The US Environmental Protection Agency issued new source performance standards and emissions guidelines for gas from landfills on March 12, 1996 and amended them on June 28, 1998. The new source performance standards affect “new” landfills that commenced construction, modification, or reconstruction on or after May 31, 1991. The emissions guidelines affect “existing” landfills that commenced construction, modification, or reconstruction on or before May 30, 1991. These rules force owners of landfills with capacity greater than 2.5 million cubic meters to operate gas flaring or energy recovery systems. Thus, there is some question whether the methane and CO2 emissions that are eliminated as a result of these EPA-mandated systems can be considered “voluntary” for purposes of the early credit legislation. This will ultimately be an issue for Congress.

Landfills are particularly fertile environments for generating greenhouse gas credits. A landfill that has more than two million tons of municipal solid waste produces an average of 1.8 million cubic feet of landfill gas per day. Based on a typical composition of 50% methane and 45% CO2, such a landfill could generate from 100,000 to 150,000 metric tons of CO2-equivalent reductions. (Methane is 21 times more potent than CO2 and, therefore, a ton of methane equals 21 tons of CO2.) Even at current values ranging between $0.50 and $2.00 per ton, such credits could be worth from $50,000 to $400,000 per year for a project.

These values should improve after legislation is adopted. Such credits may become even more valuable if the US accedes to the demands of the international community that its Kyoto reductions be substantially derived from domestic projects, rather than relying heavily on international reduction trading.

By Andrew Giaccia, in Washington