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Ethical Economics

Ethical Economics Cows, Climate Change and Carbon Credits
How a Big U.S. Utility Plans to Use Cattle to Offset Coal; It's Just a Drop in the Bucket
By JEFFREY BALL, Wall Street Journal, June 14, 2007

The biggest coal burner in the U.S. thinks it has come up with a cheap way to start fixing its global-warming problem: cow dung.

American Electric Power Co., a utility based in Columbus, Ohio, burns so much coal that it coughs out 145 million metric tons of carbon dioxide each year -- more than any other company in the U.S. That puts AEP squarely in Congress's crosshairs as lawmakers push to slap a cap on U.S. emissions of CO2, a gas contributing to global warming.

AEP is investigating various ways to curb its global-warming emissions, from boosting the efficiency of its generators to burying its CO2 output underground. But the search will be expensive and will take years. Meantime, AEP has high hopes for manure.

In a deal to be announced today, the utility has agreed to pay a middleman to put plastic tarps over lagoons holding rotting livestock waste on farms. Decomposing manure produces methane -- a greenhouse gas that, ton for ton, is 21 times more damaging to the atmosphere than carbon dioxide, scientists say.

With some sort of federal global-warming constraint looking increasingly likely, AEP's move shows how industry is on the hunt for the least-expensive alternatives. But ultimately these early moves will merely buy time for heavy emitters like AEP as they search for an affordable way to solve their real challenge: cleaning up fossil-fuel combustion.

Methane accounts for 16% of global greenhouse-gas emissions, according to the International Energy Agency. That is far less than the most prevalent greenhouse gas, CO2, which accounts for 75% of the global total. But methane is an attractive early target because it generates a big environmental bang for the buck. The methane produced by the manure of a typical 1,330-pound cow translates into about five tons of CO2 per year. That is about the same amount generated annually by a typical U.S. car, one getting 20 miles per gallon and traveling 12,000 miles per year. Normally, methane from manure wafts up into the clouds, thickening the gaseous blanket that is contributing to global warming. The AEP-funded tarps will capture that methane and send it to flares, where the methane will be burned, emitting less-harmful carbon dioxide.

In the new math of the "carbon market," that emission reduction will translate into a wad of currency called carbon "credits." AEP is banking on using those credits to offset its obligation to clean up its power plants if, as AEP and much of industry expects, Congress imposes a carbon cap in the next few years.

The notion of carbon credits is rooted in the Kyoto Protocol, which allows industrialized countries that agree to carbon caps to meet their quotas in part by bankrolling emission-reducing projects at sites where the task will be less expensive.

Several methane-capture projects that spin off carbon credits are up and running, particularly in developing countries in Latin America. The projects are funded by companies in industrialized countries that face emission-reduction quotas under the Kyoto treaty. Even in the U.S., which has declined to ratify Kyoto or impose a carbon cap, methane-capture projects are generating unofficial carbon credits on a handful of farms. The AEP project, which is set to include about 200 farms, would be far bigger than any other effort to turn cow dung to carbon credits in the U.S.

Letting companies like coal-burning utilities buy up cheap carbon credits is "very legitimate," says William Hohenstein, director of the global-change program at the U.S. Department of Agriculture. "The atmosphere doesn't care what the source of greenhouse-gas emissions" is, he says, so starting with the cheapest ones "means that you can do more with the same amount of resources."

But guarding against gaming the system is important. For instance, simply putting a tarp over a manure lagoon can increase the lagoon's production of methane. So projects should claim as carbon credits only the amount of methane that would have been emitted if the lagoon hadn't been covered -- not all of the methane produced by the covered lagoon, Mr. Hohenstein notes.

The broader issue is that targeting greenhouse-gas emissions from sources other than fossil fuel doesn't get at the thorniest part of the global-warming problem. For utilities to attack emissions by capturing farm methane is "a bit like setting out buckets in the kitchen during a rainstorm -- better than nothing, but no substitute for fixing the roof," says David Hawkins, director of the climate center at the Natural Resources Defense Council, an environmental group.

At some point, to cut emissions by as much as most scientists say would be necessary to meaningfully curb global warming, utilities will have to build new power plants. AEP and other utilities are beginning to experiment with technologies that will consume coal in ways that will let the resulting CO2 emissions be captured -- and then shot underground for long-term burial. Some estimates of the cost of that technology run upwards of $60 per ton of carbon dioxide.

AEP won't say what it has agreed to pay for each methane-capture credit. But such credits, which are being sold elsewhere in the world as a result of the Kyoto Protocol, typically go for between $5 and $8 per so-called CO2-equivalent ton.

Not only is that a fraction of the cost of new coal-plant technology, but it is also less than most people expect credits to cost on a U.S. market, if Congress does impose a carbon mandate. One proposal winning particular support in Washington envisions credits initially costing about $10 a ton, a price that would rise as time went on.

So snapping up as many credits as possible before a mandate is imposed and begins to push prices up is "very important" in minimizing the cost to AEP, says Michael Morris, the utility's chief executive. The goal, he says, is to comply with any cap "in the most cost-effective way we can, because at the end of the day our customers are going to get billed for these costs whatever they are."

AEP is contracting to buy at least 600,000 CO2 credits annually through the dung deal. That amounts to just 0.4% of AEP's total annual global-warming emissions. But that's no small number. Any carbon cap that passes political muster in Washington almost certainly will be mild in its early years; some proposals call for an initial cut of 1% per year. Under that scenario, AEP's methane-capture program could provide a big chunk of the cuts the utility would need early on.

Whether AEP actually will be able to use its farm credits -- and if so, how many -- won't be clear until Congress works out the details.

The global carbon market is plagued with big questions, and AEP has been burned before. In the mid-1990s, when Kyoto was being negotiated and it appeared the U.S. would sign up for a cap, AEP paid to plant new trees and protect existing ones in Latin America. Trees consume carbon dioxide, so AEP expected them to sprout cheap carbon credits. Some of that investment fizzled. Environmentalists challenged the legitimacy of protecting trees to offset coal emissions -- questioning how to ensure that trees nearby wouldn't be cut down and burned, sending their CO2 up in smoke. In response, United Nations officials who set the rules of the market disqualified the strategy of protecting existing trees, though now there is talk of allowing it.

About a year ago, as political debate about a potential U.S. carbon cap intensified, AEP launched another search for cheap credits. It ran "some very basic numbers," says Bruce Braine, AEP's vice president for strategic policy analysis, and the exercise "pointed to the fact that some of these methane projects were among the cheapest."

AEP is not alone in launching methane-capturing projects to produce carbon credits. Other companies looking for speculative credits in anticipation of a U.S. carbon cap have collectively birthed a nascent industry. Among the companies that have sprung up to make money off of that market is the one AEP has hired for its methane-capture effort: Environmental Credit Corp., a State College, Pa., company that was founded three years ago and has since contracted methane-capture projects on 34 U.S. farms.

Though the AEP deal is tiny in terms of the utility's emissions, it's bigger than anything Environmental Credit currently has going. Each of the roughly 200 farms will average about 2,000 cows; some farms will have pigs. Environmental Credit, which conservatively expects an average of four annual CO2 credits per cow, is investing about $25 million in equipment for the AEP project -- 80% of which it plans to borrow from a bank. Says Ed Heslop, the firm's chief executive: "We got our neck out on the line here that a market's going to develop."

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