POWER June 2012 - 24

Can California's Cap-and-Trade
Program Turn Manure into Gold?
By Allison A. Davis
C
alifornia's Cap-and-Trade Program is the only cross-industry,
market-based climate change regulatory program in the
United States. This program may provide a good investment
opportunity for dairy farmers, livestock owners, and others if the
program's Livestock Project protocol for offsets can get off the
ground and maintain a viable price for greenhouse gas (GHG)
allowances.
California's Cap-and-Trade Program is one of the strategies the
California Air Resources Board (CARB) identified to reduce GHG
emissions to 1990 levels by 2020. The program took effect January
1, 2012. Its first phase includes as " covered entities " electric
utilities and large industrial facilities that emit 25,000 or more
metric tons of carbon dioxide or other GHGs (metric tons of CO2
equivalents, MTCO2
e) annually. The covered entities' compliance
obligations for obtaining allowances and reducing emissions go
into effect in 2013.
Generally, a cap-and-trade program limits or " caps " a covered
entity's GHG emissions, and the cap declines over a scheduled
period to gradually reduce emissions. A covered entity will need
emission allowances, an allowance being one MTCO2
e, equal to its
GHG emissions under the cap. A market is made by distributing
and selling emission allowances that emitters may buy, sell, and
trade to provide allowances equal to their GHG emissions over a
set period of time. This cost-shifting allows companies to pursue
the most cost-effective emission reduction options: purchase allowances
or reduce emissions.
Offsets under the Cap-and-Trade Program
An offset is different from an allowance. An offset-producing activity
reduces GHG emissions in one location that compensates
for GHG emissions somewhere else. Instead of purchasing allowances,
or reducing its own emissions, a covered entity may reduce
emissions somewhere else and use those credits to offset its own
emissions. Or, anyone can produce offsets to provide additional
allowances for covered entities to purchase. Covered entities will
be allowed to " offset " up to 8% of emissions, where, like allowances,
each offset credit equals one MTCO2
e.
Generally, offset protocols provide that a GHG emission reduction
must be " real, additional, quantifiable, permanent, verifiable
and enforceable " and that the project takes place in North
America. One of the four offset protocols CARB has approved is
the Livestock Projects.
New Opportunity for Dairy Farmers and
Livestock Owners
A Livestock Project quantifies and reports GHG emission reductions
associated with manure management or digester systems.
Livestock manure is typically treated and stored under anaerobic
(non-oxygen) conditions-such as in lagoons, tanks, or pits-
and decomposes to produce methane, which is emitted to the
24
atmosphere in the absence of controls. For this protocol, a facility
must install a biogas control system to capture and destroy
(or use) methane gas created in an anaerobic storage facility. The
captured biogas may be destroyed on site, transported for offsite
use (through a pipeline), or used to power vehicles.
One important requirement is that the offset must be " additional " ;
state or local regulations cannot currently require the
dairy farmer or livestock owner to contain the methane from its
operations. Another requirement is that without the incentive
of the offsets, the owner would not install a biogas digester
in a " conservative business-as-usual scenario. " Thus, facilities
located outside of California may benefit more from the offset
program, as certain California animal facilities may already be
subject to emission mitigation rules and may lack the incentive
to " go green. "
The Livestock Project provides a monetary incentive to install
manure digesters, turning a liability into an asset (the offset)
that can be sold, as well as providing methane gas as a fuel. With
192 million pounds per day of manure created in California alone,
converting it to a revenue-generator is a no-brainer.
Some livestock owners use gas from digesters to power their
own facilities. For example, Royal Farms No. 1 in Tulare, Calif.,
meets monthly electric and heat energy demand by using biogas
to fuel a 70-kW and a 100-kW engine generator. Although there
is some regulatory tension as air quality control regulators weigh
the pollution generated by the digesters against the pollution
created by the manure, this offset protocol will hopefully result
in the development of better technology to meet the demand.
Getting the Price Right
CARB's first auction is scheduled for November 2012. CARB has
provided for an " auction reserve price " of $10 per MTCO2
e, which,
compared with other auction prices, seems high. The most recent
auction price at the Regional Greenhouse Gas Initiative, limited
to allowances for power plants in the Northeast, was $1.93. The
global carbon market dropped nearly 20% in price in early 2012.
The price at the start of 2011 was €6.6 (about $8.60) per ton
and in the first quarter of 2012 dipped to €6.14 (about $8.06)
per ton.
Dairy farmers and livestock owners need to determine if the
sale price of the offset credits (with potential energy savings)
supports the installation of a biogas digester that meets current
air quality regulations. Dairy farmers, livestock owners, and others
should measure their methane emissions, estimate the cost
of a biogas digester, and then conduct a back-of-the-envelope
analysis to see if qualifying for the offset would work for them-
and do good at the same time.
It may not be gold, but it's better than a pile of manure. ■
-Allison A. Davis (allisondavis@dwt.com) is a partner in Davis
Wright Tremaine's Energy Practice Group.
www.powermag.com
POWER | June 2012
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POWER June 2012

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