March/April 2007

Eye on Business

Carbon financing opportunities and the mining industry

By D. V. Tingey and R. Ezekiel

Climate change is daily front-page news in Canadian newspapers and the current minority Conservative government may well fall on the issue of an appropriate Canadian response to regulating greenhouse gas emissions. Some argue that the debate raging in the background is not really about the science or whether Canada can or should live up to existing international commitments (the Kyoto Protocol), but rather how the Canadian economy can continue to grow as an energy user, producer, and exporter while at the same time accommodating emissions controls. Targeting emissions efficiency, as the US federal government has proposed to do, may not by itself be enough, unless it also results in reductions to aggregate emissions.

Accessing foreign carbon credits through Kyoto or other mechanisms offers a way for the Canadian economy to mitigate the pain of accommodation, particularly if limits on aggregate emissions are imposed. This solution is often maligned, though, as merely a hemorrhaging of Canadian wealth abroad. But that is only half of the story. Not all foreign carbon credits are created equal. Canadian business does not need to buy excess emission rights abroad; it can bring credits back to Canada for free by “participating” in Kyoto projects. The difference is simple to understand - it is the difference between an expense and a return on an investment.

As an Annex 1 party to the Kyoto Protocol, Canada is permitted to supplement domestic efforts to reduce aggregate emissions, with the efforts of Canadian businesses abroad. Canada can subtract from its aggregate emissions, for purposes of meeting its aggregate cap, credits earned by Canadian industry by participating in Kyoto projects outside of Canada (in other Annex 1 jurisdictions and non-Annex 1 jurisdictions). Canadian Kyoto project participants can earn, in addition to the usual returns - dividends on equity, interest on loans, royalties from intellectual property, fees from services - carbon credits that can either be sold within the Canadian market, keeping the sales proceeds in Canada, or used to meet their domestic emissions reduction compliance obligations. Canada may use them in turn to meet its international obligations.

The Kyoto Protocol establishes three “market mechanisms.” Two of the mechanisms are project-based. The third is “emissions trading.” The project-based mechanisms are the Clean Development Mechanism (CDM) projects hosted by non-Annex 1 jurisdictions, and Joint Implementation (JI) projects hosted by Annex 1 jurisdictions. CDM and JI projects create emissions reduction credits that can be used to meet emissions reduction obligations of Annex 1 jurisdictions. They are tradable for value via emissions trading markets. At its purest, Kyoto Protocol-inspired carbon finance is project finance available to project participants. The credits or the proceeds from their sale by project participants into carbon markets may be allocated among the participants, by contract, to meet the financial needs of the project and to reflect the differing needs and contributions of the participants.

Given the global reach of the business, Canadian miners and metal processors are well positioned to take advantage of carbon finance markets, utilizing their international business skills and by leveraging their local economic development obligations assumed in the context of developing mines, particularly in developing countries. Even absent a domestic compliance obligation, credits have value. The CDM project pipeline now includes 1,450 projects; 496 projects are registered and another 104 are seeking registration. It is an active market, with real opportunities for carbon finance, not just in respect of mining projects, but in a variety of projects that may still be of interest or help to miners and processors. Examples include development of small-scale run-of-river hydro, wind farms, landfill gas capture, and biomass/biofuels.

An obvious way forward for underground coal miners relates to methane gas capture. Methane is a greenhouse gas. It is 21 times more effective as a greenhouse gas than carbon dioxide. Methane is a safety concern for most underground coal mines around the world, and venting methane from a mine directly into the atmosphere is business as usual. Coal mine and coal bed methane capture and conversion is a lucrative source of carbon credits.

The CDM Executive Board (EB) has approved a consolidated baseline methodology for coal bed methane and coal mine methane capture, utilization, and destruction at working coal mines (whether new or existing mines). The essential purpose of the methodology is to specify what sorts of projects will qualify as CDM projects and the method by which the number of credits resulting from the project will be calculated. This methodology is being used in the JI context as well.

The methodology applies to “…surface drainage wells to capture coal bed methane associated with mining activities; underground boreholes in the mine to capture pre-mining coal mine methane; surface goaf hole, underground boreholes, gas drainage galleries, or other goaf gas capture techniques, including gas from sealed areas, to capture post-mining coal mine methane; and ventilation coal mine methane that would normally be vented.” The methodology does not apply to “…open cast mines; methane captured from abandoned/decommissioned coal mines; “virgin” coal bed methane extracted from coal seams independently of any mining activities or use of carbon dioxide or any other fluid/gas to enhance coal bed methane drainage before mining takes place.”

A Project Design Document prepared and submitted to the CDM EB by two Chinese coal mines, with aggregate annual production of 1.5 million tons, illustrates how captured methane will be converted to electricity in two power plants rated at 5.7 and 10.8 MW. At capacity, these two power plants are projected to produce 79,000 MWh of energy and 267,000 GJ of recoverable waste heat combusting 25 Mm3 of methane annually. This level of activity will create approximately 390,000 credits annually, not to mention revenues earned or costs saved from the generation of power and heat.

The debate over Kyoto and Canada’s response to it is not over, but we should not lose sight of the fact that it is already real in many other parts of the world. The Kyoto Protocol and emissions trading presents Canadian business with a tremendous new opportunity to finance international projects. It is only a matter of time before we seize upon it.

Douglas V. Tingey and Ron Ezekiel work for Fasken Martineau DuMoulin LLP.

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