California Using Carbon Markets to Clean up Ozone-Killers

Decades after most industrialized countries banned Ozone Depleting Substances (ODS), tons of the stuff is still lurking in old refrigerators and foam insulation. Now the US state of California is using carbon markets to pay for the destruction of this environmental WMD, which can have up to 10,000 times the global-warming impact of carbon dioxide.

26 January 2011 | Jeff Cohen has spent more than 25 years developing environmental protocols and formulating policy for everyone from the Chicago Climate Exchange to the Intergovernmental Panel on Climate Change (IPCC).   Now, as co-founder of a company called EOS Climate, he can add something else to his resume: refrigerator dis-repairman.

Well, sort of.

EOS Climate works with partner companies that scour the nation’s junkyards and factories in search of old refrigerators and slabs of insulation leaking chlorofluorocarbons (CFCs) — those nasty chemicals that dominated headlines in the 1980s after it became clear they were burning a hole in the ozone layer. Though no longer used in new products, these and other ozone-depleting substances (ODS) were infused into millions of old appliances and facilities around the world. They’ve been leaking out ever since, slowly diminishing our planet’s ability to protect us from harmful ultraviolet radiation.

For Cohen and his partners, ODS could become a kind of gaseous gold that they can swap for carbon credits under California’s California’s AB 32 cap-and-trade program, which begins trading in 2012.  

They completed their first project last year.   It destroyed thousands of pounds of ODS, which can have a global warming potential (GWP) roughly 10,000 times higher than CO².   In this case, the ODS destroyed was CFC-12, a refrigerant, and its destruction had the same impact on the environment as would the sequestration of 250,000 tons of CO².

No Easy Task

The destruction took place in several steps.   First, EOS contracted a company called JACO Environmental, in Bothell, Washington, to collect CFC-12 from 21 “de-manufacturing facilities” — the modern equivalent of junk yards specializing in old household appliances and meeting rigorous environmental standards.   JACO transported all the gas to a “reclaiming facility” operated by Hudson Technologies in Champaign, Illinois.   Hudson then consolidated the gas in special containers, which it shipped to El Dorado, Arkansas, where a company called Clean Harbors Environmental Services incinerated the gas — eliminating 99.99 percent of the problem.

It is the first ODS destruction project verified and listed under the Climate Action Reserve’s (CAR) protocol for the destruction of ODS, which Cohen helped develop, and which AB 32 adopted on December 16, 2010.  

It’s also one of the largest projects of any kind listed on CAR, and has pushed Arkansas ahead of enviro-Goliath California as the nation’s largest supplier of CAR credits — an indication of the potential of ODS offsets.   CAR estimates there’s enough ODS in the US alone to offset the equivalent of 90 million tons of CO² (MtCO²e) between 2012 and 2020.

Odious ODS

ODS are not only powerful greenhouse gases (GHG), but are also responsible for depleting stratospheric ozone. The 1989 Montreal Protocol required the phase out of many known ODS in both Article 5 (developing) countries and non-Article 5 countries such as the U.S.

It did not, however, mandate the destruction of existing stocks.

Large quantities of ODS remain in old refrigerants, A/C units, building infrastructure and unused stockpiles. While some is recovered for reuse, much is left to leak out over time. Without incentives to destroy them, most ODS stocks are likely to remain in the market for years to come, ultimately being emitted to the atmosphere.

The carbon markets have emerged as a cost-effective way to finance the destruction of ODS. Up to now the voluntary carbon market has played an important role in supplementing the Montreal Protocol; however, the inclusion of these gases in a compliance program could provide an opportunity to really ramp up their destruction.

“The Montreal Protocol has been very successful up to a point, but the carbon market has provided an opportunity for it to really accelerate the destruction of these gases that otherwise would continue to be reclaimed and reused and, frankly, leaked into the atmosphere,” says Gary Gero, President of CAR.

California is spearheading the effort to include ODS credits in a regulatory regime under its statewide AB 32 cap and trade program. The California Air Resources Board (ARB) is charged with implementing AB 32, as well as harmonizing the program with the Western Climate Initiative (WCI) regional trading aspirations.

Rules for the state’s emissions trading program were approved by the ARB in December 2010, with the allowable use of offsets increasing from 4% to 8% of compliance obligations in hopes of lowering compliance costs.

As one of the adopted offset protocols, projects that destroy US-sourced ODS at approved facilities will be eligible to generate compliance offsets.

What Oversupply?

All of this has some worrying about an oversupply — a worry that many participants say is unfounded.

“I think what people overestimate is the existing supply, and also how easy it is to get,” says Daniel Smyth, Carbon Finance Director at MGM Innova. “Some of this stuff is not easy to get, like extracting it from banks in the field.”

And Cohen points out that destroying ODS is no easy task.

“It’s not like We’re just putting an after-burning on a stack at a chemical plant and burning ODS as it comes out,” he says. “We’re going deep into the infrastructure in the US and we’re getting old equipment out of commission that’s been used or is being used.”

CAR’s forecast of 90 MtCO2 of ODS credits from 2012-2020 means about 10 Mt/CO2 per year, and they estimate an average price of $5-10 per tCO2.   That’s not the only estimate in the works, however..

Forecasts from Bloomberg New Energy Finance (BNEF) are slightly higher, estimating that the total cumulative compliance grade ODS available from 2012-2020 will be 99 Mt, an average of 10.9 Mt/yr.        

BNEF predicts that an overall oversupply of credits seems more likely than an undersupply, but anticipates it to be only 1 Mt more than the annual offset limit from 2012-2020.
                                                                                                                                                 
Others, like Smyth, are concerned that ODS credit volumes are actually going to be much lower than many anticipate.

“I think the ARB is estimating it’s going to be around 10 million a year in the first three years of the program, and we would place a major discount on that number based on the discussions we’ve had,” says Smyth.

Smyth argues that much of the ODS covered by the protocol is difficult to recover from the field, difficult to replace or remains only in very small quantities. Furthermore, he is wary of basing forecasts on the number of credits that have been generated historically.

“Just because there’s been a significant amount of ODS credits generated already under CAR, I wouldn’t use that as a proxy for what’s still available,” says Smyth. “Naturally the stuff that gets developed first is the low-hanging fruit.”

Given the uncertainty around the future supply of ODS credits, Tom Marcello, Senior Analyst North America at BNEF, says ODS projects are not likely to have the drastic effect on carbon prices that some fear.

“With ARB recognition of the type as compliance-eligible, prices are poised to increase to levels observed for the other two types [livestock and forestry],” says Marcello. “In general, we anticipate compliance-eligible CAR offsets to trade at a discount to offsets developed under the ARB-protocol, which will also trade at a discount to allowances. With $10/tCO2e as the auction price floor, traders now have a reference point for which to trade compliance-eligible CRTs.”

Since the failure of Proposition 23 to kill the state’s cap-and-trade regime provided increased market certainty, Smyth indicates that the prices for credits adopted by the ARB are already trading at a significant premium.

“I think around $4-5 were the offer prices before Prop 23 failed and now it’s probably more like $8-9, maybe even beyond that,” says Smyth.

But the US isn’t the only country whose industrial infrastructure is infested with ODS.   internationally sourced ODS and the demand for these credits in the voluntary space has many stakeholders scratching their heads.

International ODS

Some stakeholders are urging the ARB to also admit into AB32 ODS offsets from the destruction of international ODS banks. As the ARB has adopted only CAR’s US ODS Project Protocol, many banks in the rest of the world will continue to leak into the atmosphere.

“It’s really important and we’re hopeful that it will happen… as long as all the criteria are met up and down the line,” says Jeff Cohen, Senior VP of Science and Policy with project developer EOS Climate – a company actively developing ODS projects for the Californian and voluntary carbon markets.

Gero says that although it’s possible that another WCI partner might pick up the Article 5 country projects, he expects that, unless adopted by the ARB, the demand for international ODS credits will remain primarily in the voluntary space.

“I think they’re a little reluctant on internationally-sourced ODS, just because of the uncertainties about those sources and whether or not it can be clear what the chain of custody has been,” says Gero. “I think there’s openness to considering it but I don’t know that it’s going to be the first step in terms of additional offset types.”

Not so Warm and Fuzzy

If Gero’s predictions are correct, international ODS projects are going to remain limited to the voluntary carbon market, at least in the short term.

But will these chemical offset projects be sufficiently attractive to pure voluntary buyers? Unlike forestry projects, the co-benefits aren’t obvious, and you certainly can’t hug an ODS.

To make matters worse, the environmental integrity of industrial gas destruction projects has recently come under fire due to allegations of corruption and gaming under the Clean Development Mechanism (CDM).

The projects in question, which produce certified emission reductions (CERs) from the destruction of hydrofluorocarbon-23 (HFC-23) and nitrous oxide (N2O), have also been criticized for producing excessive profits and crowding out other project types under the Kyoto protocol’s Clean Development Mechanism (LINK).

The European Commission recently announced that offsets from the controversial projects will be banned from use in the European Union emissions trading scheme (EU ETS) from the start of May 2013 (see HFC-23 vs. ODS, right).

Although these are entirely different projects operating in different markets, it is possible that the public perception of ODS projects could be negatively affected.

Marcello is unphased by such fears.

“I imagine there will be a few that are a little worried about it,” he says. “But when you have the California Air Resources Board saying that they’re going recognize reductions from ODS… They’re not going to think; ‘HFCs in Europe have a bad name so I’m not going to engage in this low-cost abatement opportunity to reduce my compliance cost structure.’ I just don’t see that happening.”

ODS project developer Cohen is also unphased, pointing to US-based ODS projects’ selling points to balance the bad press – pluses like job creation and technology transfer.

“It’s true that they’re chemicals so by nature you can’t put your arms around them, they’re not very charismatic on the surface. But if you actually look at our projects, we’re accelerating the transition to more energy-efficient and advanced technologies,” says Cohen.

“You’re pushing the economy into greener technologies that would otherwise take longer to deploy,” he explains. “That means more manufacturing, more jobs and a quicker path to a low-carbon economy.”

“To me that’s pretty warm and cuddly.”

Moving Forward

Despite the many uncertainties, the inclusion of ODS offsets in the Californian regulatory regime means that they are here to stay. At least while supplies last.

The realistic volume of offsets flowing into the market will shape the future availability of credits from ODS destruction projects, as will the acceptance of internationally sourced credits in the US and their role in both the voluntary and compliance spheres.

What does appear to be certain, however, is the practicality and environmental integrity of ODS projects.

“The environmental integrity of the ODS projects is hard to question if the origin can be properly accounted for… the ODS is already phased out of production, and laboratory analysis and destruction requirements are stringent.” says Smyth.

Although much remains undecided, Cohen thinks things are on the right track:

“I think it’s important that the policies keep up and keep ahead of this new category of offsets and drive it to a scale that meets the size of the problem,” says Cohen. “I think the marketplace will respond favorably because these are being looked at as highly verifiable, permanent and with multiple environmental co-benefits.”