Ready or not, The carbon market is coming to Oregon. Expect big winners — and big losers.
BY BEN JACKLET
Few people in the world, much less in Oregon, can match Mark Trexler’s experience navigating the carbon market.
Trexler founded Trexler Climate Services in Portland in 1991 to develop a market-based approach to reducing greenhouse gas emissions. He created the market’s first greenhouse gas supply and demand model and assembled the first carbon offsets portfolio. Now operating under the umbrella of Oxford, England-headquartered EcoSecurities, Trexler has spent the past two decades honing his understanding of a dizzyingly complex market of carbon allowances, exchanges and offsets, which is expected to grow to $1 trillion nationally by 2020. As Oregon prepares to enter that market by participating in the cap-and-trade program of the Western Climate Initiative, Trexler’s message is clear: no pain, no gain.
“Cap and trade is being sold as a win-win-win scenario,” he says. “In reality there will be major winners and major losers. This thing will totally transform the energy system and create some real opportunities. It will also lead to significant price increases.”
The opportunities and costs of Oregon’s climate change strategy are certain to be matters of intense political maneuvering in the 2009 Legislature. No other issue more clearly delineates the growing division between an established manufacturing economy that employs hundreds of thousands of Oregonians and an emerging clean-tech economy with far fewer jobs but growing clout. Putting a tradable price tag on the pollution that causes global warming would grant a huge advantage to the clean-tech sector, already a beneficiary of significant state subsidies, at the expense of some of the state’s largest employers.
To a certain extent the overall result of the transition would be a version of out with the old and in with the new, except the biggest winner of all may end up being the timber industry.
The Western Climate Initiative, a collaboration between seven states and four Canadian provinces, is establishing a regional cap-and-trade system for facilities that emit more than 25,000 metric tons of carbon dioxide equivalent per year. Businesses and utilities will receive allowances for their emissions based on historical data, with the allowances decreasing over time. To comply, they will have to become more energy efficient, purchase carbon credits from other businesses, or pay for offset programs to store carbon or decrease its flow into the atmosphere. Businesses that exceed their emission reduction quotas will be able to bank their carbon allowances, or trade them as if they were oil or wheat futures.
Given what has happened on Wall Street over the past year, embracing a market-based solution to the global warming problem may not seem like the most prudent approach. But many experts consider it the most effective plan, especially since a carbon tax would likely be a political non-starter. Besides, carbon markets have a track record, albeit with mixed results. A regulated carbon market has existed in Europe since 2005 (crashing spectacularly early, but recovering steadily from there), and a less ambitious version launched in the northeastern United States in September. After eight years of federal inaction on climate change policy, both presidential candidates support a national program, but resistance will be strong.
The first facilities to be capped in Oregon were identified in a preliminary — and hotly contested — list compiled by the Department of Environmental Quality (DEQ). These 33 facilities emit the equivalent of a combined 12 million tons of carbon dioxide per year. Multiply that by the going rate on the European carbon market of $35 per ton, and you get a $420 million liability. Small wonder that the Association of Oregon Industries, which represents 1,650 companies employing 200,000 workers, is sounding alarms about increased outsourcing, job losses and plant closures. The price of electricity is expected to increase by about 30% because of cap and trade.
“The downside is awful,” says John Ledger, AOI’s vice president for energy and environmental affairs. “A lot of the companies that you see on the list are manufacturing facilities that provide good-paying jobs. Businesses that can’t afford these new costs would be forced to cut jobs or outsource. And power rates would go up for everyone.”
DEQ’s list is far from complete, focusing solely on the burning of fossil fuels while ignoring electricity consumption and process emissions. New additions from industries such as glass, ammonia, resin and semiconductor manufacturing could boost the total to 50 by the time the state plans to begin capping and trading carbon in 2012.
Topping the list is PGE’s coal-burning power plant in Boardman, which puts 4.8 million tons of carbon dioxide into the atmosphere each year. The other facilities that were identified early are mainly large-scale, low-margin manufacturing or energy production plants such as Ash Grove Cement in Durkee, Cascade Steel Rolling Mills in McMinnville, Heinz’s OreIda plant in Ontario, International Paper’s mills in Albany and Eugene, SP Newsprint Company in Newberg, and PGE’s gas-burning plants in Boardman and Clatskanie. These sites are widely distributed throughout rural as well as urban areas of the state, and are often among the largest employers in their counties. Losing any of them would deliver a painful blow to a state economy that is already losing jobs.
Not surprisingly, several businesses that made the DEQ’s list have protested that the emission estimates are inaccurate. Less predictably, the complaints have been split between those who believe their numbers are too high and those who argue their numbers are too low. Why would anyone want higher pollution numbers? The reason is important: The higher the emission allowance, the easier it will be to meet, and the greater advantage the business will have within the carbon market to meet quotas and trade allowances. This could lead to windfall profits for some and a volatile market for everyone else. In Europe, too many pollution allowances were handed out early and the market crashed once it became clear that there was little if any value to the thin air being traded.
To avoid a similar scenario, DEQ will implement a more precise emissions monitoring process starting in 2009. The improved data will lay the foundation for a sprawling new program with many details yet to be decided. Chief among the issues to be negotiated in the 2009 Legislature: how to distribute emission allowances (should they be auctioned or given away?) and how to differentiate valid carbon offset programs from scams.
Gov. Ted Kulongoski, who led Oregon into the WCI coalition, has stressed from the beginning that the carbon market offers business opportunities that outweigh its costs. His sustainability adviser, David Van’t Hoff, who played the state’s lead role in the WCI process, predicts cap and trade “will stimulate tons of investment in clean tech and renewable energy in Oregon” and “all sorts of opportunities around offsets, especially for timber.”
The state’s growing cadre of clean-tech gurus make the case that putting a value on greenhouse gas emissions will jump-start a self-perpetuating cycle where money-saving innovations in energy efficiency free up money for renewable-energy investments. A recent report from Portland-based Clean Edge and Seattle-based Climate Solutions titled Carbon-Free Prosperity 2025 forecasts that the main components of the Northwest’s clean-tech sector — solar, green building, wind, bioenergy and smart-grid tech — will grow from its current 11,330 jobs to 41,241 jobs by 2025 under a medium growth scenario and 63,107 jobs under an accelerated growth scenario.
“We will see so many clever innovations once we put a price on carbon,” says Christine Ervin, a Portland consultant who served as first president and CEO of the U.S. Green Building Council. “It’s going to be a gold rush.”
Mike Burnett, executive director of the Climate Trust, Oregon’s first-in-the-nation state-mandated carbon offsets program for new power sources, predicts: “We are going to see a huge upheaval in our energy economy, and it will be one of the best investment opportunities ever.”
Oregon is well positioned to benefit from the carbon market because its hydropower infrastructure results in fewer emissions and its vibrant clean tech sector is hungry for new opportunities. Major law firms such as Stoel Rives and investment firms such as Nth Power are emerging as experts in turning green initiatives into moneymakers, while SERA Architects, Gerding & Edlen and a host of other green-building specialists are leading a massive shift toward energy efficiency in the built environment. Dennis Wilde, a principal at Gerding & Edlen who leads the firm’s Sustainable Solutions spin-off, says he can foresee “net-zero” buildings that produce as much power as they use hitting the market within five to seven years.
Portland’s green-building boom resulted in part from public policy: state tax credits to encourage energy conservation and city codes to reduce greenhouse gas emissions. Not only has Portland met its early goals of reducing pollution, it has spurred the development of an industry with great market potential. One bright spot as the bottom has fallen out of the Portland housing market over the past year has been the growing sales of “green” homes. According to Sean Penrith, executive director of the Portland nonprofit Earth Advantage, certified sustainable homes sell for an average of $38 more per square foot than the market average, and spend fewer days on the market before selling.
The question is, does the upside of these emerging trends outweigh the downside of significantly higher power rates? Angus Duncan, president and CEO of the Bonneville Environmental Foundation and chair of the Oregon Global Warming Commission, believes it does. He argues that advances in energy efficiency will ultimately cancel out the increase in electricity rates, which are expected to go up about 30% under cap and trade. “Prices will go up, but consumption will go down,” Duncan predicts. “The cost of compliance will be right around zero.”
Maybe — and maybe not. A February 2008 self-funded study by New Carbon Finance, a London-based firm that analyzes carbon markets, calculated that a carbon price of $40 per ton would reduce the nation’s GDP by $225 billion — equal to $740 for every person in the United States.
Another recent report from the George Soros-funded Center For American Progress champions the carbon market as a way out of economic turmoil. This report promotes a $100 billion program to reshape the economy for a low-carbon future, creating 2 million jobs over two years. Where the money for such a sprawling initiative would come from is unclear; the report was released before Congress began battling over a $700 billion bailout/rescue package.
Some of the biggest winners of the shift to a low-carbon future will be businesses that do not yet exist. One early adopter is Woodland Carbon Company, led by CEO Mike Gaudern. His goal as executive director of the Oregon Small Woodlands Association has been to help 70,000 small-scale timber-holding families to thrive, no easy task with timber prices stagnant and the housing market in a tailspin. His solution: carbon offsets.
Gaudern plans to collaborate with woodland owners to develop sustainable forestry projects to sell on the carbon market. By his calculations, a 3,000-acre project can yield about 10,000 tons of carbon dioxide-equivalent offsets. Multiply that by whatever the market determines CO2 is worth, (generally expected to be somewhere between $10 and $80 per ton, depending on global policies as the market develops), and you get some real potential for profits.
“If the price of carbon goes through the roof, management of the forest will change dramatically,” Gaudern says.
Portland-based Ecotrust is betting that will happen. The sustainable economy nonprofit is growing 13,000 acres of trees to maximize carbon yield as opposed to timber yield and is on the verge of closing its first carbon sale. “The potential buyers [of carbon offsets] are getting more interesting and more diverse,” says Ecotrust vice president Bettina Von Hagen.
Matt Donegan, co-president of Forest Capital Partners in Portland and a member of the WCI’s offsets committee, says the potential of offsets “could be enormous.”
Weyerhaeuser, the largest timber company in the Pacific Northwest, estimates in SEC documents that it stores 2.6 times more carbon that it emits because of its vast forest holdings. Weyerhaeuser and other large timber companies lobbied WCI to grant a large role for forestry carbon offsets in the cap and trade program, and they succeeded. Up to 49% of the mandated reductions in emissions can come through offsets under WCI.
But timber companies large and small will have to contend with a growing level of skepticism involving offset projects. The key to a valid carbon offset is the concept of additionality: Companies must go beyond business as usual. They have to prove they are storing more carbon by growing trees than they are releasing into the atmosphere by cutting trees down; those hoping to sell the carbon value of increased timber harvest will have a hard time finding buyers, because the science will be working against them.
“I’ve been working on this for 30 years, and I still have people telling me, if we could only replace that old forest with a young forest, we’d fix the problem,” says Mark Harmon, a professor of forestry science at Oregon State University. “Well, that’s not true. The old forest stores a lot more carbon than the young one. The science is well known, but people from the industry keep bringing up these discredited ideas over and over again. It’s a shame, because forests do have a lot of credibility as offsets.”
Not all Oregon timber companies will reap profits from the carbon market, but the ones that adapt to it most successfully may benefit significantly. The same rule applies to the broader economy, in the opinion of economist Joe Cortright, vice president of the Portland consulting firm Impresa. Cortright predicts the carbon market “will make some businesses obsolete, and it will create other businesses. The companies that make the transition first will be the best positioned to take advantage of the opportunities of the future.”
Ledger doesn’t dispute that notion. His concern is for the businesses that are not well positioned for the transition because of the nature of their high-energy work, but are pillars of the economy nonetheless. He worries that cracking down on the manufacturing sector will make for a painful transition in the short-term, and damage Oregon’s ability to compete in the long run. “The higher the cost of doing business in Oregon, the fewer manufacturing jobs we will have here,” he warns.
That remains to be seen. The transition to a low-carbon future has the potential to be liberating, painful or both. The cap-and-trade program that is hammered out in the 2009 session and beyond will have major, lasting impacts on Oregon’s business. For better or worse, or both, that future is coming.
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