Global warming inspires enterprising solutions

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.

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