Sustainability: Regulations

Forthcoming government regulations will require food processors to gain a better understanding of how their carbon profile might affect their business.

Energy markets are changing. In the past, all that mattered was price and reliability. In the near future, there will be additional components to consider: carbon content and carbon cost. The current administration and Congress are rapidly moving toward the implementation of a mandatory carbon compliance system and a carbon cap-and-trade market.

The legislation, authored by Energy and Commerce Chairman Henry Waxman, may be passed yet this year. If this occurs, the Waxman bill will implement a carbon cap-and-trade market by 2012 and further President Obama’s plan to reduce the country’s carbon dioxide emissions 20 percent by 2020.

Prior to the approval of this legislation, the Environmental Protection Agency (EPA) has begun drafting rules requiring certain energy users, including 13,000 factories and power plants across a range of industries, to report greenhouse gas (GHG) emissions beginning in 2010. These emissions include carbon dioxide, methane and nitrous oxide; all common emissions generated by industrial energy users.

These likely changes will require food processors to gain a better understanding of how their carbon profile might affect their businesses. To do so, each business should review its major sources of carbon, generate estimates of what the cost of carbon may be under varying price assumptions and, most importantly, estimate how your business will be impacted.

WHAT ARE THE SOURCES OF CARBON?

There are four broad sources of carbon emissions that will likely be covered under the proposed cap-and-trade system: transportation and oil-derived fuels, electric generation, natural gas and industrial processing related emissions. Collectively, these segments cover the vast majority of anthropogenic (human-caused) carbon emissions. The chart (CO2 Emissions by Type) shows the carbon emissions for each segment and total covered emissions.

As you can see, transportation/oil derived fuel is the largest segment followed by electric generation and natural gas. Direct industrial process emissions account for the smallest amount of carbon.

HOW WILL A CARBON CAP-AND-TRADE MARKET WORK?

Simply put, a cap-and-trade market places a limit on the amount of greenhouse gases that can be emitted by industries and creates a fee-based allowance for every ton of carbon emissions produced by energy users.

The emission cap declines over time as businesses continue to lower their overall emissions and as lower targets come into effect. This system creates economic incentives for energy users to find cost effective methods to reduce carbon emissions and instead implement more energy-efficient technology or rely more on renewable energy resources.

Each covered entity will be required to hold allowances equal to or greater than their emission levels. Entities that are more efficient will be required to hold fewer emissions and will have an associated lower operational cost. On the other hand, entities that are less efficient will be required to hold more allowances and will have a higher operational cost.

Under the cap-and-trade system suggested by Obama in his 2010 budget, carbon emissions from the above segments will require offsetting emissions allowances based on the amount of emissions (per metric ton) each energy user creates. The allowances will be “auctioned” by the federal government. The President has budgeted $75-$80 billion dollars per year in revenue from the auctioning of permits, starting in 2010.

After the allowances are auctioned, there likely will be a secondary market for carbon offsets and allowances. The secondary market will allow businesses to bank and trade unused allowances to facilitate market liquidity and transparency. This market will allow energy users to buy and sell the unused allowances based on each emitter’s unique situation.

Taking into account the $80 billion budget estimate that the federal government plans to secure through the allowance auction, the cost of carbon will be between $12.50 and $15 per metric ton if the revenue target is spread across all carbon emissions.

To put that in perspective, the table (Energy Source, next page) shows the cost expressed in dollars per gallon for gasoline, dollar per kWh for electricity and dollar per MMBtu for natural gas.

It is not likely that all energy users will be required to directly pay for carbon allowances. Instead, carbon allowances will be required by refiners/importers for oil; gas distribution companies for natural gas; and generators for electricity. Large energy users that emit more than 25,000 tons of carbon dioxide will be a “covered” entity and will be required to hold allowances for any direct emissions.

Depending on the size and production level of a food manufacturing facility, it is likely that larger-than-average food processors—those that emit more than 25,000 tons of carbon dioxide—will be directly subject to the cap-and-trade market.

Food processors consume a considerable amount of energy; second only the auto industry within the manufacturing sector. In particular, the process steam typically consumes large amounts of natural gas. Also, if a food processor has a wastewater treatment facility onsite, the facility will reach the carbon cap much more quickly, as wastewater facilities are sources of methane emissions, and un-combusted methane generates a significantly larger amount of carbon dioxide equivalent emissions than the combusted methane (or natural gas). These two factors can quickly add up to an annual emission of 25,000 tons of carbon dioxide, and result in mandatory EPA emissions reporting.

HOW MUCH WILL MY ENERGY COSTS INCREASE?

While not every food processor will be directly impacted by the potential carbon cap-and-trade legislation, it is important to note that there are both direct and indirect costs for all energy end users regardless of their size of operation. Although a smaller operation might not emit 25,000 tons of carbon dioxide, it still uses a significant amount of energy to run its facility.

While the smaller food processing facility will not be held directly accountable for carbon allowances, the power supplier where it purchases its energy from will be. As a result, the smaller food processors can expect to have the cost of the allowances imposed on the power supplier passed on to its customers.

Larger food manufacturers consume 1,500 MMBtu of natural gas per day and 3 megawatts of electricity. The cost will be more than $600,000 per year (based on the estimated $14.00/ton).

This annual cost would be expected to increase over time as the federal government reduces the carbon emissions cap further each year and the cost of carbon allowances continues to increase. The annual cost will be approximately $1.8 million per year if the carbon cost is $40.00 per ton. In this case, the end user will have both a direct cost (natural gas emissions) and an indirect cost (electricity).

HOW CAN I AVOID OR MITIGATE THE COST?

Energy users can reduce carbon emission levels through improvements in energy efficiency, an investment in updated technology or through the use of renewable energy sources. Many facilities have spent considerable time, effort and resources improving energy efficiency. As such, the “low hanging fruit” projects should be the first action item for food processors looking to reduce costs.

These include, for example, high efficiency lighting, boiler retrofits and compressed air upgrades. In order to reduce usage even further, more capital, labor and technology intensive projects may have to be undertaken. Getting to the next level of efficiency will be more challenging in the future due to higher capital costs, longer paybacks and less proven technology.

Renewable sources also may be a feasible option to reduce carbon emissions. Unfortunately, renewable energy alternatives will only work in a few limited situations in which a facility is either located near a renewable energy source or has a renewable energy feedstock. The first step is to assess whether or not there are any sources of renewable energy already available in the region.

For example, landfills are a natural source of methane, which a manufacturing facility can burn without fossil-based carbon emissions and possibly at a discount to the cost that would be paid through a traditional natural gas supplier. So if there is a landfill within a mile or two of a facility, there is a natural renewable energy source that could be utilized to help lower emissions and mitigate cap-and-trade costs.

Another option is to review whether or not a facility has a digestible waste or feedstock that can be converted into a renewable energy source. If a plant has its own wastewater treatment facility onsite, it likely has its own source of methane through anaerobic digestion. Another option (depending on the type of food processing plant) is to evaluate any feedstock waste it may produce and whether that waste can be converted into renewable energy.

Additionally, food processors can work with contractors to evaluate whether or not the facility has good wind power or solar power potential. In this case, state and federal incentives may be available to assist the plant install wind or solar generating devices to help power the plant and reduce emissions.

AM I SUBJECT TO THE NEW EPA REPORTING REQUIREMENTS?

Carbon dioxide equivalent emissions will have to be reported to the EPA beginning in 2010 for a broad swath of industrial, institutional and utility energy users (or distributors).

The EPA’s objective is to gain a clear understanding of all carbon emissions in the U.S. by source and entity. Industrial customers using more than 460,000 MMBtu per year of fossil energy (which amounts to 25,000 tons of carbon) will be required to report. In order to avoid double counting, utilities that are required to report also will net out large industrial users who report separately.

In addition, there are a number of industrial categories, including food processing, that are required to report. While 2010 seems far off, it is not too early to start planning how to collect and report the necessary information. In the current rules drafted by the EPA, there are specific protocols that food processors will have to follow, which can be reviewed on the EPA Web site published in the Friday, April 10, Federal Register (page 16,609, part 98 titled, “Mandatory Greenhouse Gas Reporting”).

WHAT CAN I DO TODAY?

Below are recommendations that can make the transition to a carbon-constrained marketplace easier:

1. Determine if your business is subject to reporting under the EPA’s GHG reporting rules;

2. Determine if your business is likely to be subject to cap-and-trade directly;

3. Assess the availability of information within your company required to comply with the reporting rules and/or cap-and-trade system;

4. Assess the potential operational impact of carbon pricing ranging from $12.50-$40.00 per ton;

5. Begin developing an inventory of potential energy conservation/renewable energy projects that could be implemented;

6. Consider preparing a company-wide Carbon Compliance Strategic Plan that would assess risks, identify opportunities and establish action items.

It is important to re-emphasize that the EPA reporting rules are likely to be in effect for 2010, which means there are action items that food processors need to implement before the end of 2009. These action items include the recalibration of plants’ energy meters and the creation of an ongoing daily monitoring plan that accurately captures the information necessary to report to the EPA.

As businesses prepare to move into a more aggressive carbon compliance and reporting marketplace, it is in food processors’ best interest to find ways to be in compliance with the new changes at the lowest possible costs in order to remain competitive.

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