Cashing in on cap and trade
A small Grand Junction engineering firm with an international reputation for excellence has staked its claim on the corner of a growing greenhouse gas emissions market known as cap and trade.
One of only two dozen such firms in the world, Ruby Canyon Engineering was named “runner up” for best verification company in North America two years in a row based on an industry survey, President Michael Coté said.
In September, the firm completed the first carbon offset verification project for California’s emerging public cap and trade market, the first of its kind in the U.S.
Currently, a voluntary private market exists where companies seeking to reduce their carbon footprint can buy and sell pollution allowances. A public market that became active in California this year promises to expand the trade.
Coté and his employees at Ruby Canyon find themselves on the ground floor of a lucrative new business sector with enormous potential. California’s new cap and trade laws will enlarge the market that already exists.
Ruby Canyon does not operate coal mines, fertilizer plants or utility companies that release millions of tons of polluting greenhouse gasses into the atmosphere each year.
It does not design or maintain the various systems that capture and dispose of these emissions.
Instead, the firm’s highly trained scientists and engineers are paid $15,000 or more per contract to verify the extent to which these systems are working. Each project may take several months to complete.
Greenhouse gas allowances and credits are quantified according to the amount of gas a company is able to use or otherwise prevent from entering the atmosphere.
In the case of coal mines or landfills, for example, methane gas that would normally vent into the atmosphere can be burned off at the site or used to generate electricity. Ruby Canyon verifies the amount of gas being burned or diverted.
In this way, the engineering firm acts like the U.S. Securities and Exchange Commission does in relation to stocks — it keeps emission traders honest by verifying how many metric tons of gas they are emitting, capturing or incinerating.
Without the engineering firm’s technical assessment, the true value of a company’s allowances and credits could not be accurately determined.
By verifying that certain carbon-emitting companies are complying with international standards and California law, Ruby Canyon signs off on the number of allowances or credits the company is qualified to sell.
Under California’s cap and trade law, the state sets an annual aggregate cap for the entire state — about 160 million tons in 2013, project manager Zach Eyler said.
At the end of the year, companies subject to the law, those emitting more than 25,000 metric tons of carbon a year, must turn over to the state as many credits as they need to account for all of the gas they emit.
Each credit or allowance is equal to one metric ton of greenhouse gas.
Allowances and credits are trading for about $1 to $3 per ton on the voluntary market, but in California, market forces may push that price as high as $10 per ton, Coté said.
A company that produces 100,000 metric tons of greenhouse gas each year may receive 90,000 credits free from the state. It still needs 10,000 more credits to cover all of its emissions.
It can buy those additional credits at auction or it can purchase them from other companies qualified to sell them.
“It is an active market where people are trading these allowances pretty much continuously on a daily basis,” Eyler said.
Currently, a voluntary private market exists where companies seeking to reduce their carbon footprint can buy and sell pollution allowances. The public market that came online in California this year promises to expand the trade.
“You do have typical financial entities and trading companies that … trade in all types of commodities and so for them, this is just another commodity,” he said.
“A few years ago, when they were talking about a national cap and trade program, back when (President) Obama first got elected, all of these big time traders, like Morgan Stanley, Goldman Sachs, they all wanted in. They saw this as another tradable commodity where they could buy low and sell high.” Coté said.
cap and trade EFFECTS
The California cap and trade market has at least two important impacts.
First, as the state gradually reduces the total amount of emissions allowed each year — from 160 million tons to 150 million to 140 million, and so on — air polluters will have to reduce their emissions, either by increased efficiency or by adopting systems that flare or divert the gas to energy production.
Second, it encourages projects like landfills and dairy farms, which on the margin might not otherwise be launched, by increasing their potential return on investment.
Landfills and dairy farms produce methane, but usually not enough to come within the state’s regulatory scheme.
If these projects are able to verifiably burn off or divert the greenhouse gasses they emit, they are permitted to sell on the market one credit for every metric ton of greenhouse gas they divert.
As the aggregate cap goes down, the principles of supply and demand mean the value of credits and allowances on the public market will climb, increasing return on investment for small emitters who flare or divert greenhouse gas to produce energy.
The potential for profit is why Ruby Canyon’s slogan, “Turning emissions into assets,” makes so much sense.