US: A preview of the coal mine methane offsets protocol

14 April 2014 15:28 Source:ICIS

The coal mine methane protocol is expected to bring to the market only a limited supply of offsets before the start of the third compliance period in 2018, while its attractiveness to the coal industry is still in question.

The protocol, which is expected to be approved this month, would issue credits for projects that destroy methane through various techniques at active and abandoned coal mines.

The American Carbon Registry (ACR) estimates the protocol could bring 25m additional supply to the California market by 2020, with a bulk of the credits coming in the third compliance period. For comparison, the forestry protocol is expected to bring nearly 70m credits to the market by 2020, while the ozone depleting substance protocol is expected to generate 33m, according to ACR estimates.

Developers said the protocol is unlikely to produce a large number of offsets in the short term, because it will take some time for projects to get started after the ARB, the governing body of the state’s cap-and-trade programme, approves the protocol.

No coal mine methane projects are currently registered with the ACR or the Climate Action Reserve, the two offset registries approved by the ARB.

Supply concerns

Ben Apple, principal at offset developer Environmental Commodities, said 25m could be an optimistic estimate, because a limited number of eligible mines and interested parties could restrict supply.

“The coal mining industry is very large, but the number of players interested is actually pretty small,” Apple told ICIS last week.

The developer said the biggest hurdle is convincing mine owners that the small offset revenues are worth their investment.

A large coal mine methane project could generate up to 300,000 offsets, but it would return less than half a million dollars to mine owners, after taking into account the estimated development costs, a developer said. Under current market prices, the portfolio could be valued at up to $3m. However, the value could vary depending on how the market values the protocol’s risk.

But according to ARB data, revenues from selling such offsets would represent less than 0.5% of the value of selling coal. This small profit is unlikely to cause coal companies to invest in more production to generate the offset credits.

The protocol is expected to be approved despite the California regulator received dozens of comments from the public against it, claiming the protocol could encourage further coal mining.

Mary Grady, director of business development at the ACR, said last week those fears are unlikely to change the ARB’s mind. “We don’t have reason to believe ARB will not approve it,” she said.

Possible impact on price

Some traders believe the coal mine methane protocol could reduce the overall price of allowances to the $4.00-5.00/tonnes of CO2 equivalent range, because the process of generating such credits is much cheaper compared with the other protocols ( see EDCM 17 December 2013 ).

Brokers said carbon offsets are trading in the $8.00-10.00/tonne of CO2 equivalent (tCO2e) range based on whether the buyer or seller holds the invalidation risk. California offsets can be invalidated for up to eight years from issuance, but the period can be reduced to three years if a second company verifies the emission reductions.

The protocol could cause the price of offsets to decouple from California carbon allowances, dipping well below their current levels, traders said. A source at a large utility said he believed prices are likely to dip if the protocol is passed, and prices in the $5.00/tCO2e range are possible. Others expect the price to decline to as low as $4.00/tCO2e.

Developers, instead, do not believe the protocol will cause any significant change in the price of offsets as they expect supply to be lower than demand. The ACR forecasts supply to be around half of a total theoretical maximum demand of 200m offsets, calculated assuming all entities make full use of the 8% offset quota allowed for compliance between 2013-2020.

Whether or not the quota will be fully used, however, is unclear as the attractiveness of offsets is still questionable. Dan X. McGraw

By Dan X. McGraw