Isramart : Bend startup is banking on carbon credits

Isramart news:
The climate change legislation passed last year in the House of Representatives is commonly called “cap and trade.” Though the bill's fate is uncertain, the nickname is a reference to regulations that would cap greenhouse gas emissions and create a framework for trading so-called “carbon credits” between those entities that produce excess greenhouse gases and those that destroy or sequester them.

Though the science behind such legislation is hotly debated, proponents and critics alike say the carbon credit market could be lucrative, perhaps worth $700 billion by 2013, according to Specialists in Business Information, a Washington, D.C.-based research firm.

Voluntary carbon credit trading markets, such as the Chicago Climate Exchange, already exist.

However, Oregon has indicated its interest in developing its own cap and trade system, as part of the Western Climate Initiative, a consortium of Western states and Canadian provinces that have committed to reducing greenhouse gas emissions.

Hoping to capitalize on the nascent carbon credit trade is a Bend startup, First Record Carbon LLC. Its first project successfully kicked off in 2008, when it registered carbon credits at Knott Landfill for the benefit of Deschutes County.

More recently, it has begun working with agribusiness giant Cargill Inc. on a similar project at an Idaho dairy, said Jay Castino, the company's founder.

So how does it work? What are carbon credits, and who buys them?

To answer those questions, it might help to explain how Castino got into the business.

A mechanical engineer, Castino said he's always been interested in waste-to-energy projects. A few years ago, he started poking around Knott Landfill, curious as to what the landfill was doing with its methane emissions.

Methane is a natural, carbon-based byproduct of decomposition. At landfills, it is commonly burned off — or flared, in industry parlance — either to satisfy air-quality regulations or, in the case of Knott Landfill, to prevent the foul-smelling gas from affecting nearby residents, said Timm Schimke, the county's director of solid waste.

The gas also can be flared to generate electricity. But landfill-based waste-to-energy projects remain costly and don't easily pencil in the Pacific Northwest, which has the cheapest electricity rates in the country, thanks to abundant hydropower, Castino said.

But in his poking around, Castino realized the county, by burning methane, was destroying a greenhouse gas many times more potent than carbon dioxide. Methane combustion does produce water and carbon dioxide — also a greenhouse gas — but methane absorbs more of the sun's infrared radiation than carbon dioxide.

In the world of carbon credit trading, the landfill's act of destroying methane — or reducing a greenhouse gas emission — is commoditized. In other words, the landfill was generating carbon credits that could be sold or traded.

“Jay came in and said, ‘You might have a viable (carbon credit) project there,'” Schimke said. “I was aware of the concept but hadn't considered whether we had a viable project until he came into the office.”

So who buys carbon credits? In a typical situation, a buyer would be an entity that produces more greenhouse gas emissions than are allowed or accepted by either government regulation or voluntary caps. The purchased credits would offset the excess emissions, allowing the entity to declare itself “carbon neutral.”

Currently, the biggest market for carbon credits in the U.S. is the Chicago Climate Exchange, a Chicago-based futures exchange founded in 2003. It is a voluntary, though legally binding, futures market for carbon credits.

With the county's permission, Castino began developing a system to track how many carbon credits the landfill was generating. Castino then registered his findings with the Chicago Climate Exchange, and the results were verified by a third party.

In May 2008, the landfill sold its first batch of carbon credits, netting $8,000. Castino's company earned a small commission.

But the county has not sold any credits since. Instead, the county is banking the credits it produces in hopes they will become more valuable when federal or state legislation mandates a cap and trade system.

“(They're) waiting for a legal framework because that drives the price up,” Castino said. “Right now, the only reason people buy these things is for social responsibility, or climate guilt.”

Currently on the Chicago Climate Exchange, carbon credits are trading for between 10 and 15 cents. The peak price was more than $7 in summer 2008.

(The actual units traded on the Chicago Climate Exchange are called carbon financial instruments. One CFI equals 100 metric tons of carbon dioxide equivalent. The Environmental Protection Agency defines carbon dioxide equivalent as a measurement unit used to compare the emissions from various greenhouse gases based upon their global warming potential.)

The exchange also tracks privately negotiated carbon credit sales among its 400 members. Those deals have netted prices for carbon credits, also called offsets, that range from 15 cents to $2 in the last four months.

In addition to a commission on sale, First Record Carbon also earns money by charging the county a subscription fee in exchange for cataloging how many carbon credits the landfill's methane flaring is generating. Castino's company uses a Web-enabled database application to track the credits and “bank” them for the landfill.

Castino has a patent pending on the system, which he dubs the CarbonCreditor. It allows customers to track how many carbon credits have been generated as well as calculate the expected future supply.

His company has three employees, who share office space in a former cabinet shop on Bend's First Street. Castino's company was among 10 selected to make an investment pitch at the 2009 Bend Venture Conference, and the company is currently looking for investment backing.

Castino likes to steer clear of the political debate regarding global warming and climate change. His mantra is more pragmatic: “Sell picks and shovels,” he says, referring to the generally more successful merchants who sold mining materials to the mostly unsuccessful miners during the nation's past gold rushes.

“On one hand, some people think (cap and trade is) another way to tax people, but on the other, people think it's a way to indirectly finance renewable-energy projects and transition to a cleaner, greener world,” Castino said.

Regardless of whether federal legislation is passed, California, along with the Canadian provinces of Quebec and Ontario, plan to open a cap and trade market in 2012.

Oregon companies would be able to participate in that market because the state is a partner in the Western Climate Initiative, said Bill Drumheller, a senior policy analyst for the Oregon Department of Energy.

The WCI is a policy framework targeted at reducing greenhouse gas emissions that Gov. Ted Kulongoski adopted in 2007 along with the governors of Arizona, California, New Mexico and Washington. The WCI has since been joined by Montana and Utah as well as the Canadian provinces of British Columbia, Manitoba, Ontario and Quebec.

However, in California, a petition drive is under way to scale back the state's global warming legislation, passed into law in 2006, and the state's planned cap and trade market. Additionally, the governor of Arizona announced last week the state would pull out of the WCI due to the potential economic impact of a cap and trade system.

Ted Costa, a Californian who is helping launch the petition drive, said a cap and trade market would have an adverse effect on the economy.

“Only the biggest corporations will be able to buy these credits,” Costa said. “Small business won't. It makes no sense whatsoever.”

But Drumheller believes carbon credit trading in whatever form is a field that's likely to explode in the coming years and said he sees more entrepreneurs entering the space every day.

Adds Castino: “Industry can see the writing on the wall, regardless of the status of the federal climate legislation. Interstate policy is not waiting to begin market-based mitigation on the effects of climate change.”

Luke Dupin and Jay Castino, of First Record Carbon, pose in their Bend office. The duo's company is a startup that helps client organizations tap into the world of carbon credit trading.

First Record Carbon LLC partners Luke Dupin, left, and Jay Castino created a system that allows customers to track how many carbon credits they have generated.