By Jeffrey Liebert
Many ventilation engineers at gassy longwall mines face a significant challenge in managing methane to permit it from flowing into the working areas of the mine. Faced with the risk of gas concentrations exceeding allowable standards, the primary focus of any mine ventilation engineer is to remove the methane in the most expedient manner possible—usually through a combination of central ventilation and pre- and post-mining degasification systems. For most mining companies, the possibility of capturing additional value from this waste gas has not been a priority.
Today, emerging U.S. policy to regulate greenhouse gas (GHG) emissions through a cap-and-trade program presents mine managers with a new opportunity to explore and develop methane utilization or abatement projects that generate value from the monetization of carbon offset credits. In addition, the rising focus on U.S. energy security and domestic energy supply is prompting mine managers and engineers to give further consideration to the importance of their methane gas by-products. The market through which coal mine methane offset projects can be developed and carbon offset credits monetized is quickly maturing. While many methane utilization projects have previously been uneconomical, the carbon offset credit market provides a new set of financing tools for mine engineers to capitalize these projects today.
Converting a Liability into an Asset
As a GHG, methane is 21 times more potent than carbon dioxide, the most prevalent GHG. Any type of intervention to capture and combust methane that would otherwise have been liberated would reduce GHG emissions; if properly implemented and verified, projects that reduce these methane emissions can generate carbon offset credits.
Combusting methane is a critical component to the emission reduction process, as methane is converted to carbon dioxide and the global warming potential of the gas is significantly reduced. Thus, when a mine installs an incineration or oxidation device to combust extracted methane, or uses the methane for beneficial purposes by running the gas through a generator to produce electricity or conditioning it to create pipeline quality fuel, an emission reduction occurs.
As a simple rule of thumb, the degasification and ventilation methods that generate a stream of methane that can be captured and combusted to create emission reductions are post-mining and pre-mining degasification (in-seam or seams within the area of mining influence), and the exhaust of ventilation air methane (VAM). These sources of methane emissions are collectively referred to as coal mine methane (CMM), though there are a number of hard rock mines, such as trona mines, that also generate significant sources of methane emissions.
In contrast to CMM, the destruction of extracted coal bed methane (CBM) is not considered to qualify as an emission reduction. CBM is extracted purely on a commercial basis, whereas CMM is a waste gas byproduct that is liberated into the atmosphere as the result of the coal mining process. Simply put, capturing and combusting CMM creates an emission reduction, while extracting and combusting CBM does not generate an emission reduction.
Methane is a very serious safety concern to mines. Given this concern, it is not surprising that CMM is largely viewed as a liability by the mining industry, and the standard of practice in the industry is to liberate methane from mines to maintain a safe and productive working environment for mine workers. The only incentive for a mine to invest in a project to capture and combust liberated CMM would be for one singular purpose—to generate a profitable return on the investment. While there are a handful of mines in the U.S. that have developed commercial or near-commercial capture and combustion projects such as pipeline fuel injection projects, the vast majority of mines in the U.S. continue to liberate CMM into the atmosphere.
Monetizing the Asset
Carbon offset credits can only be generated from projects that result in additional emission reductions. Once a mine engineer and manager have determined that their methane liberation and combustion method has the potential to generate an emission reduction, the next step is to assess whether a carbon offset credit can be claimed. Carbon offset credits can be claimed from CMM capture and combustion projects that are additional, or that would likely not have been developed without the incentive of a market for GHG reductions. Additionality is important to ensure that offset credits are not being claimed for emission reductions that would have occurred regardless of whether offset credits were a contributing factor to the development of the project.
In most cases, CMM is liberated into the atmosphere because capturing and combusting the gas is not be commercially viable. In contrast to CBM, which is typically of high-quality and can be directly injected into a pipeline with minimal or no conditioning, CMM is often contaminated with other chemical compounds such as nitrogen, carbon dioxide, heavy hydrocarbons, and dust that require costly conditioning equipment before the gas can be used for beneficial purposes. In addition, gas of highly diluted methane concentration such as VAM may have little or no economic beneficial use value.
Carbon offset credits provide a new incentive for coal mines to view CMM as an asset. First, the carbon offset credit revenue streams can actually make a pure-play methane emissions abatement project profitable. In addition, given that carbon offset credits are new to the mining industry, there are financing structures that can de-risk the project investment, including innovative pre-payment and securitized offtake agreements with carbon offset buyers. Furthermore, depending upon the project, revenue from the sale of pipeline gas or energy savings resulting from the onsite beneficial use of energy can play a role in further strengthening project economics.
For those gas utilization projects that have looked marginal on Btu values alone, the addition of carbon offset credits may make the difference in a mine’s decision to allocate capital and develop the project. There is growing evidence that mines are now taking increased interest in the opportunities to use carbon offsets to facilitate project development. In addition, recent decisions on gas rights by the Bureau of Land Management are trending favorably for coal mines on federal lands.
Decoding Federal GHG Policy Initiatives
Carbon offset credits are a critical cost-containment feature of a cap-and-trade program for GHG emissions. Cap-and-trade is designed to achieve an established level of reductions at the lowest overall economic cost. There is precedent in the U.S. for pursuing a GHG cap-and-trade program as a middle-ground regulatory policy for reducing emissions. The first cap-and-trade program in the world was implemented in the U.S. to reduce SO2 emissions from electricity generators under Title IV of the 1990 Clean Air Act Amendments. The idea behind cap-and-trade is that companies with different marginal costs of reducing emissions can work within the constructs of a trading market to most efficiently meet a designated cap on emissions. Carbon offset credits, which represent the value of the reduction, avoidance, or sequestration of 1 metric ton of carbon dioxide equivalent (CO2e) generated from uncapped sectors or facilities, can be used to comply with or “offset” a percentage of the reduction requirements within the capped system.
While a future federal cap-and-trade program is likely to regulate the majority of emissions sources in the U.S., a number of sources or sectors are not likely to be regulated, either because the aggregate level of emissions is too small to be efficiently regulated or because the individual sources of emissions are difficult to regulate. To date, GHG legislation proposed in Congress has generally indicated that fugitive methane emissions from livestock farms, coal mines, and landfills will not be subject to an emissions cap. Instead, GHG reductions from these sectors are expected to be more effectively and appropriately encouraged under an offset program, where asset owners can generate compliance-grade offset credits that can be sold to companies regulated under the cap.
Coal mine methane capture and combustion projects are ideal offset projects under a cap-and-trade program. While fugitive methane is the largest source of GHG emissions from the mining sector, these emissions only represent approximately 1% of total anthropogenic GHG emissions in the U.S. In addition, mine methane is released in a diffuse and often inconsistent manner, and methane flow and concentration can vary greatly over time, even at just one mine. In many instances, it may be technically challenging or uneconomic to capture this methane. The safest and most economically viable way to foster reductions of these emissions is by providing coal mines with the incentive to develop methane capture and combustion projects under an offset program. As opposed to regulating emissions and requiring mines to reduce emissions, mines have the incentive to develop such projects and ultimately have the freedom to determine whether to do so.
While a federal cap-and-trade system does not yet exist and the majority of carbon market trading is still voluntary, an active “pre-compliance” market for carbon offset credits has emerged following the growing likelihood that a compliance system will be in place and operating by 2012. In this market, companies that are likely to be regulated under a future cap, such as large industrials and utilities, have begun to purchase carbon offset credits from the very project types, including CMM, that are likely to be recognized under a federal program. In addition, the financial institutions who already trade commodities like coal and power are also actively buying carbon offset credits. This presents a significant opportunity for coal mines, which can leverage the synergies of bundling and selling carbon offset credits with their coal products to utilities and other large industrials that will likely be regulated. These companies benefit from the ability to purchase carbon offset credits as opposed to purchasing more expensive emission allowances from the government, or installing onsite emission reduction equipment, which is usually a more costly abatement option. Federal legislation introduced to date has typically included provisions to provide some kind of recognition for carbon offset credits generated in advance of a federal program that meet certain standards for eligibility. As a result, there is a market now for those carbon offset credits from CMM projects that have a high potential to be banked and used by pre-compliance buyers to meet a future emission reduction compliance obligation.
The pre-compliance market for offset credits is only expected to continue to grow, given the rising slate of legislative and regulatory activity to address GHG emissions. Currently, the House Energy and Commerce Committee has passed a draft cap-and-trade bill proposed by Congressmen Henry Waxman (D-CA) and Edward Markey (D-MA). While the bill is expected to face some opposition by both House Republicans and Democrats, and the language is likely to undergo significant changes over the coming months, there is growing pressure for Congress to take action. In April, the EPA released its endangerment finding on GHGs, a ruling that starts the process of developing rules to regulate these emissions under the Clean Air Act. The convergence of the EPA ruling and the circulation of draft climate change legislation by Congress indicates that GHG emissions will likely be regulated on some basis.
While GHG regulation creates some very real threats to the coal mining industry, mining companies should closely follow developments that will enable them to find opportunities under a cap-and-trade program.
Coal Mine Methane Offset Project Types
There are a range of CMM project types that can be developed in the U.S. market to abate and/or productively use methane and generate carbon offset credits. The primary methane combustion and processing technologies can be broken down into three main categories: (1) incineration/oxidation for abatement purposes, (2) gas conditioning for pipeline injection, and (3) power generation for beneficial use purposes.
Oxidation technologies, such as regenerative thermal oxidizers, are now being deployed on operating mines to abate methane emissions. The first commercial plant was implemented by BHP Billiton’s Illawarra Coal, West Cliff Colliery in Australia using the MEGTEC oxidation technology. This plant is using a combination of drainage gas and VAM to fuel a 6-megawatt (mw) power plant that generates electricity from super-heated steam. The first oxidation technology installed on an operating mine vent shaft in the U.S., the VAMOX VAM mitigation system, was recently commissioned by Biothermica Technologies at Jim Walter Resources’ Mine No. 4 in Alabama (See case study, “First VAM Oxidation System to be Commissioned at an Operating Mine in the U.S.”).
For the lower-quality, variant gob gas, the most commonly used abatement method is incineration using enclosed stack flares, incinerators, and thermal oxidizers. The first operating mine projects abating gob gas using incineration technology to generate carbon offset credits are targeted to be operational in the fourth quarter of 2009. (See case study, “Developing a Gob Gas Utilization Project Financed by Carbon Offset Credits”). The higher-quality mine methane extracted from the post-mining GVB wells and pre-mining in-mine horizontal/vertical bore holes or directional drilling boreholes from the surface can be channeled through a centralized gas gathering system, then processed into pipeline-quality gas using gas conditioning technologies including cryogenic, membrane, pressure swing absorption, and amine solution processing. Lastly, co-generation lean gas engines and onsite boilers can be feasible alternatives for low-quality gas utilization if there is onsite demand for the energy, especially given that current U.S. electricity forward curves indicate a rise in wholesale electricity prices of upward of 70%.
Certifying and Selling Coal Mine Methane Offsets
The current market for carbon offset credits can be characterized as highly fragmented. There are a number of competing programs operating in the U.S. under which CMM offset projects can be certified and registered. Certification programs play the gatekeeper and standards setting role governing the process by which carbon offset credits are created and monetized. Most importantly they set the guidelines by which third party auditors certify carbon offset projects, in some ways similar to an ISO certification process. These certification programs provide project methodologies that are used by project developers as a blueprint to develop a successful project, and outline the specific criteria for determining project eligibility, calculating emission reductions, and conducting ongoing project monitoring and emissions reduction data collection.
While all certification programs have their unique process for certifying projects that generate carbon offset credits, the certification process typically follows an in-depth, multi-step process that is designed to ensure that carbon offset credits generated are independently verified to be additional and properly quantified. This process can be managed in parallel to the engineering design, development, commissioning, and operational stages of implementing the capture and combustion project at the mine.
Currently, there are two certification programs that have approved project protocols for CMM projects. The Voluntary Carbon Standard (VCS) offers a methodology approved under the Clean Development Mechanism, the international compliance-based offset market under the Kyoto Protocol. The VCS protocol is applicable to projects that combust VAM, and methane extracted from pre-and post-mine drainage systems. The Chicago Climate Exchange (CCX), which operates a voluntary yet binding cap-and-trade market, also has an approved protocol for CMM projects. CCX’s protocol can be applied to projects combusting VAM, and methane extracted from pre- and post-mine drainage systems, as well as abandoned mines.
There are also two programs in the process of developing protocols for CMM offset projects. The Climate Action Reserve, an independent, nonprofit organization that has had its protocols recognized by the State of California for voluntary GHG reductions, is developing a protocol for CMM projects that is anticipated for release in October 2009. Rachel Tornek, senior policy manager leading the CMM protocol stakeholder working group process for the Reserve said, “carbon offset credits generated from CMM projects could provide a valuable cost-containment mechanism for a future cap-and-trade program, as well as high quality credits for today’s voluntary carbon market” and adds that the Reserve’s “goal is to develop a protocol that enables a transparent, rigorous and standardized process for verifying GHG emission reduction projects at active coal mines in the U.S.” The EPA is also developing a CMM protocol for use under the voluntary Climate Leaders Program, but has not announced when the protocol will be formally published.
Project developers have a choice about which certification program to use for a given project, and consideration should be given to a number of different factors when making this determination, including market pricing for credits and the likelihood of acceptance under a future compliance market. Given the state recognition the Reserve has received, projects certified under the Reserve have a high probability of generating credits that will be eligible to trade in a future compliance market, and pricing for the Reserve credits reflects this wide market expectation. In February, the Reserve credits were reportedly trading at an average of $9.90/ton, a 50% premium to VCS average pricing of $6.60/ton. CCX credits have generally been trading between $1-$2/ton, a price which can make projects a challenge given the capital costs required for most high-quality CMM capture and utilization projects, which tend to require minimum pricing for credits between $2 to $4/ton. Over time, implementation of a federal cap-and-trade program should place upward pressure on offset prices. For example, in a recent analysis of the economic cost impacts of the Waxman-Markey proposed GHG legislation, the EPA estimated prices received for domestic offset credits in 2015 will range from $11 to $14/ton. By 2020, the EPA estimates these prices will increase to $14 to $18/ton.
Coal mines have reached an important inflection point in responding to the challenges of climate change policy and emerging GHG emissions regulations. There are some strong indications that coal mines are well positioned to avoid being subject to a GHG emission compliance obligation, and thus will be eligible to abate and/or use their CMM to generate carbon offset credits on a voluntary basis. These indicators include successive climate change bills that reference CMM projects in the “positive” list as a source of carbon offset credits, and the recent announcement that the Climate Action Reserve is targeting to issue a CMM protocol as of October 2009—a certification program that could qualify under a future federal climate change program. In response, a group of first mover mines in the U.S. are implementing innovative methane capture and abatement/utilization projects targeting lower quality CMM waste gas that otherwise would be liberated into the atmosphere for safety reasons. These mines are capitalizing on the market opportunity to generate energy savings, while leveraging additional revenue streams from the sale of carbon offset credits. To maximize value in the current U.S. pre-compliance carbon markets, mines are advised to select the most reputable certification programs and follow the most rigorous standards and protocols for certifying their carbon offset credits. While the choice to pursue carbon offset credits may prove to be a difficult one for coal mines, many of which may be conflicted by the politics of climate change, carbon offset credits do provide a real financial tool to further capture value from existing coal and gas reserves.
Liebert is managing director of the Verdeo Group. Marisa Buchanan, Ben Apple, and Nicolas Duplessis contributed to this article.