LFG projects continue to hold their place in the carbon markets comprising 17% of CDM projects, but waste managers need to consider post Kyoto strategies for new projects.
In 2009, the Carbon Market reached US$144 billion dollars, up from US$118 billion dollars in 2008 (Kossoy and Ambrosi 2010). Primary CDM market volume dropped 59% in 2009, but the EU Emissions Trading Scheme markets expanded (Kossoy and Ambrosi 2010). Despite the disappointing outcome from Copenhagen, a non-binding accord was reached. It provides a structure to facilitate emission reduction commitments needed to limit global temperature rise to 2°C. The US Congress shows no sign of getting a climate bill passed before 2011, leaving global carbon markets muddied and uncertain, however, landfill gas (LFG) projects still have the potential to sell into the European Union Emission Trading Scheme (EU ETS) market beyond 2012, to sell into the expanding voluntary market and to participate in the eventual US market.
Ever expanding footprint
The main drivers of the current carbon market remain the Kyoto Protocol and the EU ETS and the Regional Greenhouse Gas Initiative (RGGI) in the USA. Despite a drop in the primary CDM market, the lower 2009 selling prices for primary and secondary CERs, €6-8 and €9-11 respectively, seem to be recovering in the second half of 2010 with current prices for primary and secondary CERs, based on a recent review of Emission Reduction Purchase Agreements (ERPAs), increasing to €8-10 and €12 respectively (Carbon Positive 2010).
As the Kyoto Protocol nears the end of its first (and very likely only) phase in December 2012, there is rampant speculation about the future of the carbon markets, climate change regulation worldwide and especially the CDM. The lack of a legally binding, global, successor agreement to the Kyoto Protocol out of the Copenhagen COP has increased uncertainty across the carbon markets although the Copenhagen Accord may provide some structure and opportunities to access climate finance as negotiations toward a new agreement continue to move forward. It is fair to say that at this point in time, the future of the carbon market is not clearly defined. There are strong indications that the market is firmly established and that market mechanisms will continue to play a role in any global agreement to address climate change in the future and there is widespread agreement that the CDM will continue in some manner, at least in some countries although it is expected to be more limited in scope. The EU ETS continues to accept CDM credits for compliance through 2012 and since it has been extended by the EU through 2020, it is conceivable that offset project opportunities through the EU ETS may continue post 2012.
The CDM is still making tracks
There are now more than 4 200 CDM projects in the pipeline with 2 303 registered in 55 countries around the world, including more than 17% waste handling and disposal projects. China and India continue to dominate as host countries. In 2009 and throughout the beginning of 2010, the primary CDM market saw an overall decline in volume and price per tonne, but Africa doubled its market share. Africa’s contribution to the market rose to 7%, equivalent to 15 million tonnes (Kossoy and Ambrosi 2010), but South Africa still has only 17 registered projects out of the 2 303 registered worldwide. Four of these registered CDM projects are landfill gas CDM projects (eThekwini – 2, registered in 2006 and 2009, EnviroServ’s Chloorkop project, registered in 2007 and the Alton landfill registered in 2009) with a 5th awaiting registration any day (Ekurhuleni 2010).
Waste sector CDM projects worldwide are second only to energy industry projects, which include renewable energy projects (UNFCCC CDM home 2010). To date, there are 474 waste sector projects registered (UNFCCC CDM home 2010) and the number continues to rise, as does the number of emission reductions traded from these types of projects. However, the volume of CERs traded from waste sector projects is less, approximately 11%, within the primary CDM market (Figure 1: Kossoy and Ambrosi 2010). This discrepancy could be due to the lengthy process of having CERs issued. The lag time, up to 607 days on average, could be influencing the volume of CERs available for trade from the waste sector (Kossoy and Ambrosi 2010).
While often an economic driver for CDM waste projects, the CDM financial contribution cannot solve all financial barriers for new landfill gas projects. At the moment, LFG projects are seeing a 1.04 return on investment based on ERPAs in the World Bank Portfolio. The price per tonne has the largest impact on the IRR of any project and so a price increase from US$10/tonne to US$20/tonne more than doubles the IRR for a project. Also, forward sales of CERs (to be generated in the future) can improve the IRR in the short term, however, future generation of CERs is not guaranteed and so buyers generally apply a hefty discount on the price (Kossoy and Ambrosi 2010). Commitments to purchase future CERs that have been verified have been more successful in attracting higher prices. Overall, CDM financing – while still an option in some cases – has not been a panacea for getting new projects off the ground. Moving forward this trend will continue and projects may need to piece together additional financing options.
It is also important for waste managers particularly to be clear about why to consider doing a CDM landfill gas project. Revenue from the sale of CERs is always a good thing but we submit that this is a secondary benefit to municipalities. We often advise municipalities that the CDM is an excellent opportunity to secure an important gas management tool (gas extraction and recovery) and have someone else pay for some or perhaps most of the cost. While South Africa does not require landfill gas extraction and destruction at this time, at some point in the future it can be expected to do so. Waste managers should seize the opportunity to develop landfill gas CDM projects before such a requirement is imposed. Once a law or regulation is passed requiring gas extraction and destruction, there will no longer be the possibility to prove ‘additionality’ meaning that the CDM project would not have happened in the absence of carbon finance. Whether projects are developed under the CDM or using other avenues (see discussion of Voluntary Market and REFIT below), there is still time.
Separate from the CDM, there is a, still small but growing, worldwide voluntary carbon market, which will continue independently of the compliance market. The voluntary market has favoured landfill gas projects with per tonne prices somewhat above the average as compared to a multitude of other types of carbon reduction projects. This voluntary market can offer potentially significant opportunities for South African landfill gas projects while the international picture gets sorted (or not) by the world’s largest emitters.
A recent report on the voluntary market (Hamilton et al. 2009) states that there has been a ‘flight to standards’ in the voluntary carbon world that can confirm the quality of voluntary carbon offsets. These standards, an important factor in the market value of carbon credits in the voluntary market, are intended to ensure that any voluntary carbon credit purchased is real, verifiable, permanent, additional, and enforceable. While there are more than a dozen voluntary carbon standards that compete for projects, four carbon standards have emerged as widely recognized standards and are the basis for most of the volume of offsets available: the Voluntary Carbon Standard (35%), the Climate Action Reserve (31%), the Chicago Climate Exchange (12%) and the Gold Standard (7%) (Hamilton et al. 2010).
The Voluntary Carbon Standard (VCS) has become the preferred carbon standard and has been used for the majority of voluntary projects. VCS has a stringent procedure that allows developers to create new methodologies but accepts them only after they have been fully validated by two independent third party validators (VCS Association 2010). All four of these standards are rigorous, cover multiple sectors, and require third party verification. The Climate Action Reserve (CAR), based in the state of California in the USA has developed or is developing sector wide protocols for landfill gas, forestry, coal bed methane, livestock, and other project types, all intended for use across the USA, Mexico and Canada. The CAR offsets are viewed in the USA in particular as desirable because the protocols have broad based applicability and are viewed as likely ‘pre-compliance offsets’ that may be grandfathered into a national compliance program in the USA.
Similar to the compliance market, the volume of the voluntary market declined in 2009 by 26% and continued its decline in early 2010. This is in contrast to an increase in value and volume throughout 2006, 2007 and 2008. However, the volume traded in 2009 still exceeded the volume traded in 2007, thus indicating a certain stability and establishment of the market. Despite the decline in the size of the voluntary market, LFG projects remain in good standing in this market. Overall, LFG and other methane destruction projects dominated the voluntary market and accounted for 41% of the traded volume in the USA (Hamilton et. al 2010). Specifically, LFG projects comprised 31% of the market (Figure 2: Hamilton et al. 2010). LFG offsets are still fetching higher than average prices at $9.60/tonne, compared with the average US$6.50/tonne.
The USA produced and purchased the highest volume of offsets within the voluntary market, indicating a strong movement toward preparing for an eventual compliance program in the country. 2009 was the first year that the USA surpassed Asia in volume traded (Hamilton et. al 2010). The expansion in trading of LFG credits indicates acceptance of LFG projects in this voluntary market place. This trend, in conjunction with the push toward pre-compliance quality offsets, indicates that LFG offsets are considered high quality, dependable and desirable as long as they are developed in accordance with stringent rules. As the voluntary market continues to expand worldwide, it is a viable option for projects that can no longer expect to be up and running before 2012. With 2012 soon approaching, and no clear post-Kyoto plan, the voluntary market is a viable alternative to the CDM for emission reductions from LFG. It is not too late to begin new LFG projects for this market, which is not only in the USA but in Europe and Japan and showing signs of life in developing countries.
Beyond the voluntary carbon market there are alternative environmental markets including in South Africa. Government’s recent actions have the potential to stimulate the LFG to renewable energy market in South Africa. In March 2009, the National Energy Regulator of South Africa (NERSA) announced and approved the landmark Renewable Energy Feed-in-Tariff (“REFIT”) guidelines (Cameron). These guidelines call for a premium to be paid for energy from renewable energy projects including specifically LFG to energy. This reflects a growing internal trend and a policy decision to try to incentivise alternatives to coal based energy. The REFIT, once implemented, will surely offer life to LFG projects independent of the CDM. The promise of the REFIT has already stimulated this new market and led to new businesses in the country. It has also attracted new international players to South Africa with many more watching the scene unfold, and some already looking for new domestic partners.
The International waste-to-energy market
The European Union is currently dominating the US$28 billion waste-to-energy market, but other countries are joining that market as pressure mounts especially in Europe for alternatives to landfills (Globe-net 2010). To date, waste-to-energy projects have appeared primarily in the public sector, but as interest grows, the private sector is also starting to develop projects (Globe-net 2010). Within South Africa, the waste-to-energy market may have potential and some even predict will grow 10.5% through 2014 (Frost and Sullivan 2009). “Waste-to-energy generation can play a pivotal role in alleviating the pressure on landfills and the disposal of any waste material that is not recyclable in South Africa,” says Frost & Sullivan research analyst Derrick Chikanga (Frost and Sullivan 2009). However, the authors caution waste managers and officials to approach the waste-to-energy advocates with a healthy dose of scepticism. South African waste managers must take a good, hard look at costs in the South African context. Landfills remain a viable disposal option and in our view carbon LFG projects are likely to remain more viable and reliable than waste-to-energy as potential revenue generators for the foreseeable future.
Although there is less project origination in the market due to post 2012 uncertainty, there is still a need for pre-2013 projects. In general, buyers in both the compliance and voluntary markets are still looking for more projects; good projects. The market will favour projects that: 1) can scale up, 2) maintain steady generation of emission reductions over time, 3) have a low risk of emission reduction failure, and 4) allow for multiple financing mechanisms to work together (Kossoy and Ambrosi 2010). LFG projects can fit that bill.
There is less confidence in prices overall and this is not likely to change overnight. It is interesting to note that a carbon price of at least €40 per tonne is likely to be needed to prevent an increase in global temperatures of more than 2 degrees Celsius. Unfortunately, price expectations in 2020 are much below that and there is still a risk that entities will pull back from the market if there is no significant progress in international policy by 2012 (Gleddhill 2010).
With the ‘discovery’ that a low carbon economy can create green jobs, that renewable energy makes environmental and economic sense, and the realisation, despite the growth of waste-to-energy, that landfills are here to stay and so is the voluntary carbon market, there is most definitely a visible footprint and life after the CDM.
by C Lee, J Bogner, L Van Hook