Research already has shown that carbon could be stored in forests and soils. As long as the trees are not cut down, nor the soils plowed up, the carbon stays put.
A pilot project in Illinois is working to give emitters of greenhouse gases some incentive to reduce carbon dioxide output. Those incentives could even provide a side benefit to farmers.
David Miller explains.
Dale Heydlauff is American Electric Power's vice-president of Environmental Affairs.
Dale Heydlauff, American Electric Power: "I mean, we have been real students of the science, we have been studying it for a decade or more. I will candidly admit to you that early on we were a skeptic as were most people in the business community. ...We have become convinced that it is an issue that needs to be taken seriously, one that we are committed to addressing in a very proactive way and I think our actions demonstrate that."
Enter Dr. Richard Sandor. In the late 80s, Sandor developed the concept of selling emission credits as an added incentive for major corporations to comply with the required reductions of sulfur dioxide, the main component of acid rain.
Dr. Richard Sandor, Environmental Financial Products: "It was an awful lot of skepticism about any kind of emissions trading or using market based solutions for the environment but we had a good track record and some products like interest rate derivatives in the 70's and so we were able to move the ball along."
Through his "cap and trade" model, any company that reduced its sulfur dioxide emissions below the federally mandated maximum could sell the amount that represented the difference. The plan was adopted by the U.S. Environmental Protection Agency in 1990. In March of this year, the 11th Acid Rain Allowance Auction was conducted and the proceedings netted $32.3 million.
Financed in part by grants totaling $1.3-million from the Joyce Foundation, he began more than three years of work with the staff of his Chicago-based company Environmental Financial Products. The goal was to create a pilot project to trade carbon in the same manner as sulfur dioxide. The work gave birth to the Chicago Climate Exchange, a cap-and-trade version of the SO2 Allowance model. The projected date for trading to begin is sometime late spring or early summer.
Participating companies agree voluntarily to hold carbon dioxide emissions at 1999 levels and further agree to reduce that level by 4% a year over a 4-year period. Initially, 14 companies, including AEP, Dupont and Ford, will purchase credits that represent storage of carbon in either trees or soil. If a company does reduce its CO2 output through the installation of some kind of technology, that difference can also be sold on the exchange.
To gauge the value of the carbon, Environmental Products decided that one metric ton of stored carbon would equal one carbon credit. Sandor and his staff created formulas that estimate the amount of carbon being sequestered each year.
- densely planted pines will hold 600 to 700 metric tons per acre
-a stand of 15-year old birch trees will hold from 1 to 2 metric tons of carbon per acre - one acre of grassland would hold 3/4 of a metric ton of carbon
- and land utilizing the farming technique of "no-till" would sequester a 1/2-metric ton of carbon per acre.
Though Sandor is not projecting profits for farmers he does point to a World Bank study that estimates one carbon credit might sell for between $1 and $5. This would mean a farmer practicing no-till on 250 acres, the minimum for a contract with the exchange, would receive a portion of between $500 and $2500 over four years, the length of a standard contract.
Dr. Richard Sandor, Environmental Financial Products: "The other sources of supply, we think, are really most exciting and that is the opportunity for farmers and for forestry companies to basically trap carbon in the soil and in trees and a below ground biomass."
The amassing of carbon-credits for this pilot project will be done through insurance companies in a seven state area including Minnesota, Wisconsin, Iowa, Illinois, Michigan, Indiana and Ohio. This method was chosen because insurance companies can create binding contracts that would guarantee compliance.
Bidding for credits will be made on 25-thousand acre lots or approximately 12,500 metric tons of sequestered carbon. The exchange will be regulated by the National Association of Securities Dealers and all transactions will be handled electronically.
This is not the first exchange of its kind. Currently, several trading schemes are in various stages of development around the world. According to the World Bank, an estimated 400-million dollars worth of carbon credits could be sold this year alone.
Heydlauff knows that AEP will purchase carbon credits as a method of controlling their output of GHG's until more economical technologies are developed.
Dale Heydlauff, American Electric Power: "...we will almost certainly be a net buyer of credits in the Chicago Climate Exchange which is good from some standpoints. An exchange or a trading system isn't viable unless there are buyers and sellers and the fact is, we do anticipate our emissions to grow as a result of increased demand for electricity. We will be looking at lots of possibilities to reduce that growth on system where we can do so but frankly if it's cheaper for us to buy credits, that's the route we're going to take."
One of the lingering questions is whether the trades will be accepted by the international community. Heydlauff is confident American Electric Power's work will not go unnoticed.
Dale Heydlauff, American Electric Power: "We are continuing these efforts even though there is skepticism because we think that only through the demonstration of the effectiveness of this approach will we be able to convince policy makers that they ought to include it as part of an admittedly broad portfolio of responses to a highly technical and complex issue."
For Market to Market, I'm David Miller.