Carbon as a Commodity

Chances are the United States will bring into play a mandatory carbon emissions reduction program sooner rather than later. In the second of a two-part series, EPM explores the domestic carbon trading market and what the future could hold for ethanol producers.
By Kris Bevill | November 03, 2008
As a noncomplier of the Kyoto Protocol, the United States is one of the last westernized nations in the world to employ some type of carbon emissions reduction program. The European Union's mandatory carbon emissions reduction program is the largest in the world. Japan is in the initial stages of employing a nationwide carbon cap program. Australia and New Zealand are planning government-regulated cap-and-trade carbon reduction programs. Canada is similar to the United States in its adoption of voluntary programs, however, some provinces have decided to follow other international examples and pass mandatory reduction and trade programs. The most notable of these programs is in

Alberta, where oil companies have been actively drilling the tar sands and are major customers of that mandatory carbon market. It is important to note the various international emissions reductions programs because greenhouse gas emissions affect the world no matter where the emissions occur and many believe that, ultimately, an international program will be needed to properly address the situation. Those countries already implementing emissions reduction programs will no doubt set the standard for others to follow.

Change is on the horizon for carbon emitters in the United States and ethanol producers need to be aware of their potential role to shape the nation's carbon market. Ethanol producers, as they currently stand, are emitters of carbon dioxide. If no changes are made to the way ethanol is produced, most producers will find themselves competing with other industrial companies to buy carbon credits should some type of cap-and-trade-program become law. However, with a few energy-saving steps, the ethanol industry can "green" its image and become an example of a fuel production industry that earns credits rather than uses them.

"I don't know if the ethanol industry is prepared for what might happen," says Jim Murphy, president of Carbon Green LLC. His company specializes in working with biofuels companies to reduce their "carbon profile" in order to become carbon generators and then monetizes the credits on the U.S. voluntary market, namely the Chicago Climate Exchange. Murphy has been working in the carbon world exclusively for a few years now, and he admits that it is not easily understood. But one thing is certain, he says. Once ethanol producers begin to focus on carbon they automatically begin to focus on energy, and "ethanol plants need to focus on energy." Murphy believes many ethanol producers may not realize that they will be forced to reduce their emissions under a federal greenhouse gas emissions reduction program and it may come as an unwelcome surprise unless they begin to take steps now to reduce their energy use.

Pressure for Policy
So what is in store for carbon as a regulated commodity in the United States? No one really knows. The number of proposed legislative measures that have been introduced regarding the reduction of greenhouse gas emissions is in the hundreds and no one seems to think that the government will agree on a program by the end of 2009.

At press time, the most recent document to be posed to Congress was a discussion draft on climate change legislation presented to members of the U.S. House of Representatives Committee on Energy and Commerce by committee Chairman John Dingell, D-Mich., and energy subcommittee Congress Chairman Rick Boucher, D-Va. In a memorandum to committee members, Dingell and Boucher state, "Politically, scientifically, legally, and morally, the question has been settled: regulation of greenhouse gases in the United States is coming." But even they say that it is unclear exactly what form of regulatory program will be adopted.

The draft proposed by Dingell and Boucher calls for a cap-and-trade-program which will gradually reduce greenhouse gas emissions until reaching a goal of 80 percent below 2005 levels by 2050. Major company types to be regulated under this proposal are power plants, producers and importers of petroleum, other fossil fuels and bulk gases and other "large industrial facilities," which may very well include ethanol producers. Those producers not covered in the "large" category would then fall into the small source category, which includes all sources emitting less than 25,000 tons of carbon dioxide per year. The draft proposes those sources be held to industry-specific emissions standards, as should be determined by the U.S. EPA.

The proposal given to energy committee members is a discussion draft, not a bill proposal. Boucher and Dingell say their draft is the result of nearly two years of committee work on climate change and that it should result in the passage of climate change legislation by the next Congress. However at the same time, their executive summary of the draft states, "Reaching a consensus on a national approach to addressing climate change will be difficult under the best of circumstances."

Certainly the views of the next president will play a role in shaping the policy. Elections had not been held by press time, but Sens. Barack Obama, D-Ill., and John McCain, R-Ariz., have both stated their support for a nationwide, mandatory cap-and-trade carbon emissions reduction program. In response to a question posed to the candidates by regarding their positions on a cap and trade system, Obama said he planned to reduce emissions to 80 percent below 1990 levels by 2050. McCain's plan would reduce emissions to 60 percent below 1990 levels by 2050. Obama said his plan is in line with reduction levels scientists have deemed as necessary. McCain said his approach would be easier on American businesses, specifically coal-fired plants, allowing them time to adapt to policy changes. Both candidates' plans call for a more stringent baseline than the draft proposed by Boucher and Dingell, which serves as an indicator of all the specifics that need to be debated before a program can be put in place. There's much work to be done, but it is expected that no matter who takes office in January, a cap-and-trade-program will be addressed within his first year of office.

One of the issues that will need to be addressed is: Who will regulate compliance of a federal program? The EPA is an obvious choice because it regulates the Clean Air Act and has been active in many of the greenhouse gas emissions programs and proposals thus far. However, the number of employees needed to conduct compliance check-ups may be more than the agency can offer. The Boucher/Dingell draft proposes that oversight responsibilities, including the prevention of fraud and manipulation, be handled by the Federal Energy
Regulatory Commission, with the EPA playing a smaller regulatory role. It is one suggestion of many to be hashed out over the next Congressional session.

Also up for debate is whether a monetary value should be assigned to carbon. At a House energy subcommittee hearing earlier this year several private industry executives testified that assigning a dollar value to carbon would expedite investments by companies into energy-saving processes.

Producer Participation
There are many options available to ethanol producers interested in reducing their energy use. In January 2008, the EPA suggested that producers look at combined-heat-and-power-systems to create negative carbon emissions. Other choices include the integration of biomass gasification , such as the system Chippewa Valley Ethanol Co. LLLP chose for its 46 MMgy Benson, Minn., facility. Frontline BioEnergy LLC produces gasifiers and is the other half of the CVEC project. Frontline general manager Norman Reese says his company can provide gasifiers for a variety of uses and that their products will aid producers in compliance with whatever type of emissions reduction program is finally decided on. He's seen a lot of interest already from ethanol producers, although their No. 1 priority so far has been to reduce energy costs, he says. That's fine, because when input costs are reduced, carbon credits can be a welcome secondary benefit to having the system in place.

"A lot of people have been watching this," says Bill Lee, general manager of CVEC's plant. A number of curious producers have visited the plant to see the system that will soon generate not only energy but carbon credits for CVEC. For now, Lee says producers are keeping an eye on both the carbon market and natural gas prices, but he predicts that more producers will soon begin altering their plants to save energy and join the carbon market. It might take a few years before the country gets a cap-and-trade-system up and running, he says, but as a credit generator he's willing to wait and will be ready to reap the benefits.

The use of landfill gas may be a viable alternative for biorefineries located within close enough proximity to a municipal landfill. Poet LLC reached an agreement earlier this year with the city of Sioux Falls, S.D., for the transfer of methane produced at the landfill to the company's Chancellor, S.D., facility to be used as an energy source. They are just one example of this type of partnership.

Other producers might use Corn Plus LLLP as an example of how to reduce energy inputs and produce carbon credits. The company decided several years ago to install a fluidized bed boiler that could utilize leftover corn syrup as an energy source. At press time, Corn Plus was the only ethanol producer thus far to sell carbon credits on the Chicago Climate Exchange. They didn't sell for much compared with Europe's prices, but Keith Kor, Corn Plus general manager, says he and other company shareholders are betting that carbon credits will only become more valuable. Kor believes that the United States will adopt a market similar to Europe's and that the next president will re-enact the United States' participation with the Kyoto Protocol, which will then require the government to enact some type of program.

Producers should realize that it will take some type of investment on their part to become carbon credit generators. Lee says that a few years ago many believed that traditional ethanol production would be low in carbon emissions and would therefore qualify for credits. That's simply not true. Producers need to reduce their energy intake and greenhouse gas emissions to become credit generators. Installing some type of energy-generating system that reduces the need for natural gas is a sure way to not only reduce operating costs, but also add possible revenue by becoming a carbon credit generator. And there is no time like the present to get started.

Kris Bevill is an Ethanol Producer Magazine staff writer. Reach her at or (701) 373-8044.