Natural Capital of Lewistown, Montana on the cutting edge of new global market that could pay big dividends for Central Montana landowners

On the second floor of the Brooks Building in Lewistown a new consulting/brokerage firm named Natural Capital opened its doors last October. The firm, jointly owned by Denton native Ryan Allen and Lewistown residents Matt Sass and his wife Dr. Lynn Roberts, is at the forefront of a new commodity exchange market. It’s a market that has been operating in the U.S. for less than five years, but which, according to the Wall Street Journal, accounted for $60 billion in sales globally in 2007, and which has the potential to become one of the largest commodities markets in the world.

by JIM DULLENTY
News-Argus Staff Writer

Natural Capital is positioning itself to become a regional player in the trade of carbon credits, a commodity that you can’t see, touch or feel, but one that may ultimately have a significant economic impact on Central Montana.

Understanding the trade in carbon credits requires a certain shift in thinking about how a commodities market works. The corporations, organizations and private individuals who buy or sell carbon credits are not exchanging ownership of a traditional commodity so much as trading in a privilege – the right to pollute.

According to a Natural Capital publication, “A carbon credit is a certificate representing the reduction of one metric ton (2,205 lbs) of carbon dioxide (CO2) emissions. If you develop a project that reduces CO2 emissions directly or removes CO2 from the atmosphere, every ton of emissions reduced/removed results in the creation of one carbon offset.”

These offsets have value, and can be bought and sold on an open exchange. Carbon credits create a market for reducing greenhouse gas emissions by giving monetary value to the cost of polluting the air. Emissions become a visible part of the cost of doing business and can be calculated on a balance sheet alongside raw materials or other business liabilities and assets.

“Carbon credits are not your traditional commodity,” Allen explained. “You’re not going to drive up in a truck one day and make a delivery on your six tons of carbon. It’s more similar to a stock. A stock is a piece of paper that says you own some portion of a company. In the end you can sell that stock and get money back.”

A new global market

According to the Wikpedia web site, the organizational model for a carbon credit market was developed during the United Nations Framework Convention on Climate Change in 1997. At that convention, a treaty known as the Kyoto Protocol was drafted creating a framework and a set of rules to establish a global trade in carbon credits. A central pillar to establishing a global carbon market under Kyoto guidelines is a financial concept known as “cap and trade.”

Cap and trade programs are intended to give polluters a financial incentive to reduce their greenhouse gas emissions. (Greenhouse gases are characterized by their ability to absorb and hold heat in the atmosphere. They include carbon dioxide, methane, nitrous oxide and hydroflurocarbons, among others.) Under Kyoto, countries are required by 2012 to reduce their greenhouse gas emissions 5.2 percent below what they were emitting in 1990. Governments are given the responsibility to set emission caps for individual polluters. Polluters that beat their assigned emission caps receive credits, which can then be sold to other firms willing to pay to pollute.

For example, say an auto manufacturing plant is putting out 100,000 tons of greenhouse gas emissions per year. That plant is given a quota to meet of 80,000 tons per year. The plant either reduces its emissions to 80,000 tons or is required to purchase carbon credits to offset the excess. It’s a market-based approach to encourage polluters to reduce their greenhouse gas emissions, either by investing in cleaner machinery and practices or by purchasing emissions from another operator who already has excess capacity.

Over time, the caps are lowered, making it costlier to choose to keep polluting and encouraging investment in new clean technologies. Permitting allowances to be bought and sold allows companies to seek out the most cost-effective way of reducing their emissions.

“It allows businesses to gain time to address their own emission problems,” Allen explained. “When carbon emission caps are put into place, buying offsets allow businesses to adjust to the market. It’s a way to take on some of these environmental challenges with a free market approach that still maintains individual property rights.”

To date, more than 170 nations have signed the Kyoto Protocol, including the United States. According to Jeff Yastine, Senior Editor for the National Business Review, the trade in carbon is well established in Europe, where credits have been bought and sold on the European Climate Exchange since 2002. However, the U.S. never ratified the Kyoto Protocol treaty. As a result there are currently no U.S. laws that require corporations to control carbon emissions into the atmosphere and no cap and trade program underpinning a domestic carbon credit exchange.

None the less, a voluntary carbon credit-trading platform is now actively exchanging carbon offsets in the U.S. The Chicago Climate Exchange (CCX) was launched in 2003 and, according to the Wall Street Journal, reported 2007 revenues of about $27 million. Currently the CCX has more than 400 members ranging from corporations like Ford, DuPont, Motorola, GE and Wal-Mart to municipalities like Oakland and Chicago to farmers and their organizations like the National Farmers Union and the Iowa Farm Bureau. The total volume of carbon traded on the CCX has grown by 100 to 300 percent each year since 2005 and totaled more than 23 million metric tons in 2007.

Why would major, hard-nosed, profit driven corporations voluntarily become members of an exchange that requires its members to sign legally binding commitments to reduce greenhouse gas emissions?

Allen points out the marketing advantage to companies, who can tout their environmental responsibility to their customers, but more than that, the winds of regulatory change are now blowing through the halls of Congress.

According to the Library of Congress, in January of 2007, Senator Joseph Lieberman (I-CT) introduced the Climate Stewardship and Innovation Act of 2007 into the U.S. Congress. A central feature of that proposed legislation is the establishment of a cap and trade program for greenhouse gas emissions. The Climate Stewardship Act had 11 cosponsors. Among those are Hilary Clinton, Barack Obama and John McCain.

“We’re within three to five years of following the European model for climate change,” Allen said. “The legislation is in the pipes right now. It will definitely effect large-scale companies – the GEs, the Wal-Marts and the gas companies. Pretty much all business will have to look at their carbon emissions and find some way to deal with those. Offsetting is a way they can do it.”

The fact that all of the leading candidates for president have publicly endorsed a cap and trade based greenhouse gas emission regulatory program has had a dramatic effect on the price of carbon credits. Richard Sandor, CEO and owner of Chicago Climate Exchange outlined carbon credits recent price increase during a March 25 interview on Nightly Business Report.

“The price movement has been fantastic since Super Tuesday, (Feb. 5, 2008 when 24 states held either primaries or caucuses) Sandor said. “On Super Tuesday prices were $1.90 for carbon and once it became clear that all three candidates favored the cap and trade, they went to $5.60 in three weeks. It’s a raging bull market and volumes are moving up exponentially.”

What’s in it for us?

So what does this mean for Central Montana, an area that has no smokestack industry, and why would a company like Natural Capital choose to locate one of its two statewide offices in Lewistown?

The answer is simple economics.

In any market where there is a high demand, buyers will seek out new sources from which to obtain an available supply. In the carbon market, one of the primary opportunities for new credit sources comes from agriculture.

“Across the board, agriculture is generally the base market where our carbon credits are coming from,” Allen said.

The process works like this. Specific land management techniques such as no-till farming, managed grazing and tree planting keep a larger proportion of living plant biomass on the landscape. Through the natural process of photosynthesis, plants capture atmospheric carbon and bind it up in the soil – a process known as sequestration. If a farmer, rancher or forester can show through independent scientific verification that they have implemented land use practices that are sequestering more carbon from the atmosphere, then those property owners are eligible to receive carbon credits, which can then be sold as offsets to carbon emitters on the CCX.

“The reason Natural Capital is based in Lewistown is that half of our business is developing relationships with farmers,” Allen explained. “We’re working with local farmers to develop carbon sequestration techniques in their farming. If they use no-till farming or utilize managed grazing systems, this binds up more carbon from the air and generates a carbon credit. One acre of no-till ground can sequester between .32 and .6 metric tons of carbon. If you’re getting $5 a metric ton, then that’s $2 – $3 per acre. If you’re already doing these practices then it’s free money. You’re getting paid for practices you’re already doing. That’s money in your pocket.”

Allen also noted that on the European Climate Exchange, carbon credits are currently selling for between $25 and $26.

“There’s no guarantee on what will happen with prices in the U.S.,” Allen said. “But if a cap and trade does come to the U.S. and carbon prices rise to European levels, then farmers in Central Montana could potentially realize a $10 to $15 per acre carbon credit payment annually, and that’s significant.”

“Economics is what it is,” he continued. “As a private property owner you should want to get all the natural capital you can out of your property. We’re finding that land has value for carbon sequestration, it has value for aquifer storage, it has value for wetlands – all these sorts of things. The whole idea is, if you’re going to get that extra premium on your property, then you need to adopt a new style of farming.”

Allen admits that he has met with some skepticism from property owners he has approached regarding the sale of something they can neither smell, taste nor feel.

“I’ve had people say, ‘This doesn’t have legs. It’s not going to be an industry that’s going to last.’ Well if you’re doing it already, it’s money you could be getting right now. If it doesn’t last in the future, then you’ve lost nothing.”

“Even if you don’t believe in CO2 as a pollutant or in global warming, if you’re not on board you’re going to miss out on an opportunity,” Allen continued. “By sitting back and refusing to be part of it or refusing to even be part of the dialogue, agriculture might miss out on that whole battle.”

“It’s a kind of be ready for all possibilities approach, and that is probably the best type of approach when you’re dealing with any industry.”

http://www.lewistownnews.com/news1.html