Stock and Trade

Harold Buchanan

The American Clean Energy and Security Act (ACES) recently passed by the U.S. House of Representatives represents a significant step toward the creation of a U.S.-based greenhouse gas (GHG) cap and trade program. The act represents a compelling opportunity for landfill owners facing shrinking tax receipts to generate additional revenue. There are hundreds of U.S. landfills capable of creating GHG offsets, ranging from 50,000 to more than 100,000 offsets annually, potentially creating a new revenue stream for an individual landfill equal to hundreds of thousands of dollars per year.

A GHG offset, generically referred to as a Verified Emissions Reduction (VER), is a certified reduction of GHG emissions that serves as currency available for sale in a secondary market. These offsets are verified and issued in electronic form by one of several nationally recognized GHG offset registries. The buyers of GHG offsets include investors building a portfolio of carbon-based assets, as well as entities seeking to reduce their carbon footprint. The opportunity for landfill owners becomes even more compelling when one considers that methane is approximately 21 times more effective at warming the atmosphere than CO2. Thus, a landfill owner receives approximately 21 GHG offsets for each ton of methane destroyed.

Landfill owners are beginning to take notice of this opportunity, as evidenced by a recent transaction between Coker, Ala.-based Black Warrior Solid Waste Disposal and CE2 Carbon Capital, based in Solana Beach, Calif. CE2 agreed to purchase VERs created by the destruction of methane at the Black Warrior landfill.

How does a VER get created and what are the key issues landfill owners need to understand in order to benefit from creating and selling them? The first step is to understand the varying protocols and standards used by U.S.-based GHG offset registries. In the aforementioned transaction, the VERs were registered through the Climate Action Reserve (CAR) a non-profit organization that has established what it describes as “regulatory-quality standards for the development, quantification and verification of GHG emissions reduction projects in North America.” Other industry-recognized registries include the American Carbon Registry (ACR), the Voluntary Carbon Standard (VCS) and the U.S. Environmental Protection Agency's (EPA) Climate Leaders. Each standard has varying protocols to confirm that a methane reduction meets certain criteria. The reduction must be additional, permanent and verifiable, which will impact the reduction's potential use in a federal cap and trade program as well as its current market value.

Once a registry has been selected, the process begins with the installation of gas collection, destruction and monitoring equipment. The landfill owner may choose to install this equipment or may seek a partner willing to provide financing as well as manage the risks of the project. If the facility has already installed this equipment, it may still be eligible to generate offsets by demonstrating historical methane destruction, subject to specific standards and protocols. These standards and protocols address the past level of monitoring and recording of methane destruction, the date collection and destruction equipment was installed, and whether the landfill was required to install such equipment under regulations such as EPA's New Source Performance Standards.

In some situations, landfills may have already begun creating offsets under a standard that no longer maximizes the value of future offsets. This demonstrates the risk landfill owners assume if they speculate on future price movement. However, if a landfill owner finds himself in this circumstance, project-related changes may allow future offsets to qualify under a more highly valued standard. Landfill owners should note that, under CAR, pre-existing projects installed after Jan. 1, 2001, have until November 17, 2009, to be eligible for CAR registered offsets.

Once the methane is collected and destroyed, a third-party verifier will visit the site to review records and equipment and ensure that the methane destruction has taken place. This is one of the final steps before the registry issues a certificate representing the saleable commodity. The verifier will then repeat this process each year that the landfill is eligible to create GHG offsets.

How then does the landfill owner cash in on methane destruction? The owner may choose to enter into an agreement with a partner or other financial counterparty and sell their future production of GHG offsets, in some cases years in advance of production. This provides a fixed source of revenue, allowing landfill owners to make long-term budgeting decisions, remove future price risk and enhance the economics of landfill operation. A landfill owner can then focus on their basic operations while removing the regulatory uncertainty and price risk inherent in the GHG offset market.

The House's passage of the ACES bill has begun to push landfill owners to consider their role in climate change. This is an opportunity for landfill owners to take an active lead in the development of a GHG offset market. Monetizing GHG offsets from methane destruction presents an innovative way for landfill owners to achieve significant environmental benefits while enhancing landfill economics.

Harold Buchanan is the Chief Executive Officer of CE2 Carbon Capital, Solana Beach, Calif.

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