Thursday, February 21, 2008

Global warming inspires enterprising solutions

By Paul Davidson, USA TODAY

The phone-booth-size machine humming away in a Tucson lab may look like a science-fair project on steroids. Its inventors, however, say it's a potent new weapon in the battle against global warming.

Its task is elegantly direct. The 9-foot-tall device, encased in see-through plastic, scrapes the chief global warming gas — carbon dioxide — right out of the atmosphere. As air wafts through, CO2 sticks to large chemically coated panels while oxygen and other innocuous gases breeze by. The carbon inhaler's developer, Global Research Technologies, is among hundreds of U.S. companies scouring for ways to reduce the world's greenhouse gas emissions and cash in on federal requirements anticipated by 2010 to combat global warming.

"It's a gold rush," says Peter Fusaro, head of consulting firm Global Change Associates.

The CO2-busting industry is exploding as federal legislation to cap the emissions of utilities and other industries grows more likely, offering the prospect of huge profits. Nearly 400 start-ups are operating 600 carbon-mitigation projects in the USA, with the number of companies set to triple the next two years, says consulting firm Point Carbon.

Their product? Carbon offsets. One carbon offset, or credit, equals a ton of CO2 removed from the air.

Hedge funds and investment banks are starting to trade offsets like stocks and bonds, betting they could soar in value if greenhouse gas caps are imposed. JPMorgan (JPM) expects to buy and sell hundreds of millions of offsets this year, up from tens of millions last year.

For several years, entrepreneurs have had modest success selling credits to corporations and consumers who want to be good citizens and offset the carbon that's produced when they drive cars or use electricity.

Many are deploying tried-and-true techniques such as burning the noxious emissions of landfills and cow manure and restoring forests. Others are testing grander but more controversial strategies, such as growing carbon-absorbing plankton in the South Pacific.

The voluntary market for U.S. offsets is still meager, though it more than doubled last year to $150 million to $200 million, says research firm Ecosystem Marketplace. In Europe, which has complied with mandatory carbon limits since 2005 under the Kyoto treaty, the offset market hit $10 billion last year. Sales in the USA, the world's biggest carbon emitter, could be as high as $175 billion by 2020 if a federal cap is approved, says research firm New Carbon Finance.

Such legislation has grown all but inevitable. Although President Bush opposes carbon caps, Democratic presidential candidates Hillary Clinton and Barack Obama, and Republican front-runner John McCain all favor curbs. Many analysts expect a law to be passed by 2010 and caps to start as early as 2012.

Under a bill that cleared a Senate committee in December, global-warming discharges by major polluting U.S. industries would be cut 71% by 2050. A cap and trade system would be created to spur progress. Utilities, oil companies and manufacturers that exceed their emissions caps would buy allowances — which don't yet exist — from others in those industries that fall under their limits. Unlike an offset, which is a ton of carbon extracted from the air, an allowance lets a company emit a ton of CO2.

The number of allowances would fall over the years, driving up prices, as the government lowers maximum emissions.

Costs come down on consumers

The two carbon currencies — allowances and offsets — will likely merge. The leading proposal in Congress would let companies offset up to 30% of their emissions by buying carbon credits. In other words, instead of cutting its own pollution or purchasing allowances, a utility could buy offsets that fund carbon reduction elsewhere in the USA. That would be a boon for offset suppliers, which could sell credits at much higher volumes and prices than they do now.

Today, offsets cost $3 to $8, Evolution Markets says, but they're expected to track the prices of allowances as those enter the market. Allowances are expected to cost at least $25 by 2020 and $60 by 2040.

Those costs largely would be passed on to consumers. Electric rates in some areas could rise up to 45%, and gasoline prices could go up 25 cents a gallon by 2020 under some forecasts.

If allowance prices get high enough, it will become economical for emitters to make permanent fixes, such as adding pollution-cutting equipment to a carbon-belching coal plant.

Yet some frown on offsets. David Doniger, a policy director for the Natural Resources Defense Council, fears excessive use of offsets early in a cap-and-trade program could encourage polluters to put off investments to slash their emissions.

Offset suppliers face other uncertainties that could torpedo their plans. It's unclear what types of projects would qualify for offsets and whether credits that predate a new law would be eligible. Officials also would examine whether a project would have gone ahead even without offsets, likely disqualifying it for credits.

Despite the hazy outlook, emitters are starting to buy offsets in the hope they'll be able to use them to meet federal mandates. In the largest such deal, American Electric Power, (AEP) the nation's biggest coal-fired power generator and greenhouse gas emitter, agreed last year to purchase 4.6 million carbon offsets from Environmental Credit from 2010 to 2017.

Environmental Credit will generate the offsets by burning the methane produced by the manure of 400,000 cows at 200 farms. Although burning methane produces CO2, methane is 21 times more harmful to the atmosphere. Livestock manure accounts for 6.6% of U.S. greenhouse gas emissions.

By purchasing the offsets in future years, when carbon caps are likely to be in place, AEP thinks the Environmental Protection Agency will be more likely to approve them. And by inking a deal now, the utility seeks to lock in lower prices.

"We're firmly of the mind there will be some kind of global-warming program in the not-too-distant future," says AEP Chief Executive Michael Morris. "To that end, we're trying to build a bank of credit."

Morris would not say what AEP will pay for the offsets. But Environmental Credit executive Derek Six says it's more than today's $5 price of an agricultural offset but less than the roughly $20 tab projected in the next decade under a federal program. Environmental Credit is spending $25 million to buy equipment for the AEP project and will share offset revenue with farmers.

Lofty environmental goals

Others are eyeing bigger carbon bounties. Blue Source plans to capture the carbon dioxide spewed by a Kansas fertilizer plant and sell it to petroleum fields to boost oil output. It's spending about $70 million on equipment to corral the carbon as well as on pipelines to send the gas about 100 miles to the oil fields. Blue Source already has five similar setups in the USA.

It will snare about 650,000 tons of carbon a year from the Kansas plant, the equivalent of removing 113,000 cars from the road. At today's offset prices, Blue Source will recover its investment in about five years. But projected prices in the next decade under a federal cap would halve the payback period, says CEO Bill Townsend. More than half of the offsets Blue Source sells go for a premium because they're for post-2010 projects that emitters hope will meet federal caps, up from 10% six months ago, he says.

"It wasn't a bad business before, but it's not the business (a federal cap) will bring us," Townsend says.

Some start-ups are grounding their businesses in Mother Earth. Equator Environmental plans to restore forests, at a cost of about $1,000 an acre. Deforestation accounts for about 20% of the world's global warming gases.

With an acre of trees swallowing just 2 to 8 tons of CO2 each year and offset prices under $10, the business is barely profitable until a cap brings higher prices, says CEO Jeff Bortniker. Meantime, Equator plans to harvest trees for extra revenue, planting new ones to keep the forest population in balance.

Still others are tinkering with technologies they say could offer breakthroughs under a federal system that pays top dollar for carbon reductions. The carbon-absorbing machine being tested in Tucson was funded by Gary Comer, the founder of Lands' End (SHLD) who was moved to combat climate change in 2001, when he was able to sail the Arctic Ocean without the aid of an icebreaker. Comer died in 2006.

If deployed in large numbers, the carbon-filtering machines could slash new emissions and vacuum decades-old gases out of the air, says Allen Wright, president of Global Research Technologies.

Wright envisions machines the size of 40-foot-long shipping containers that could be trucked to vast isolated stretches where carbon would be buried when technology to do so is available.

With each device able to remove a ton of carbon a day, about 30 million units could scoop up 10 billion tons a year, or about a third of the world's emissions, he says. Costs to capture carbon initially would be about $250 a ton, far more than the projected $100 per ton price of U.S. allowances in 2050. But Columbia University geophysicist Klaus Lackner, who teamed with Wright to invent the machine, says mass production could drive prices to $30 a ton.

There are skeptics. Electrodialysis, which separates the carbon from the panels, uses so much electricity that it produces nearly as much carbon as it removes. Capturing and storing CO2 from the biggest single source — coal plants — as researchers are working to do, would be far more efficient, says Gary Rochelle, professor of chemical engineering at the University of Texas. "These kinds of projects are a terrible distraction," he says.

Lackner says the CO2 separation instead could be driven by an electricity-free thermal process.

Another carbon-buster with big ideas is turning toward the open seas. Climos wants to dump up to 1,000 tons of pulverized iron over a patch of ocean as large as 15,000 square miles in a bid to germinate plankton. Iron ore has been shown to promote the growth of the microscopic ocean algae, which inhale as much CO2 in six months as a forest consumes in decades.

Yet critics, such as Rutgers University biophysics professor Paul Falkowski, say the plankton also releases some carbon as it decomposes before it sinks to the ocean bed. As it decays, it produces nitrous oxide, which is far more damaging to the atmosphere than carbon, Falkowski says.

Climos CEO Dan Whaley, co-founder of travel site, agrees such risks must be studied but says early research suggests the carbon absorbed exceeds toxic emissions enough to make the project viable. If such seedings are repeated annually for 25 years, they could suck in 1 billion tons of CO2, he says.

With each seeding costing several million dollars, Whaley says a large-scale program would be feasible only under government regimes in the USA or Europe that provide for high offset prices. Yet neither the European system nor proposals in Congress permit ocean-based offset projects. Whaley believes such constraints could be lifted after demonstration projects prove the technology.

"If it works, then it's a large solution," Whaley says. "We need all the horsepower we can get because the problem is way bigger than we imagined."

Carbon offsets today are largely bought by utilities and corporations such as PepsiCo that want to offset the carbon dioxide they produce from trucks and cars or generating electricity. If the federal government caps carbon emissions, certain industries would have to buy carbon allowances and offsets to continue to pollute, which would give them an incentive to cut emissions. Examples of how offsets and allowances work:


Each offset is a ton of carbon dioxide removed from the atmosphere or prevented from entering the atmosphere.

An allowance is a right to emit a ton of carbon dioxide. Carbon allowances don't exist now.

Carbon offset supplier works with a farmer to generate 300,000 offsets when methane produced by cow manure at farms is burned. Methane is 21 times more damaging to the atmosphere than carbon.
U.S. government each year would distribute allowances to major industries that emit carbon dioxide, auctioning some and giving away some free.
Investment bank buys offsets for $5 each, or $1.5 million, betting they'll rise in value. Offset supplier and farm owners split revenue.
A utility that relies heavily on coal-fired power plants might have to buy up to half its allowances in the early years, getting the other half free. Allowance costs would be passed on to consumers.
Utility buys offsets from investment bank for $7 each, or $2.1 million, hoping they can be used to meet future federal greenhouse gas limits.
The cost of allowances would rise over the years, increasing the utility's incentive to invest in cleaner energy, such as a nuclear reactor or a wind farm, to reduce emissions.
Offset prices are expected to soar when they can be used to supplement allowances to meet federal caps.

Sources: Evolution Markets, USA TODAY research

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