For biogas company Yield Energy, letting that methane escape is akin to throwing money into a massive fire heating our planet's climate. The Toronto start-up has other plans. It wants to collect all that slop, speed up its decomposition in a contraption called a digester and burn the resulting methane in a turbine that generates clean electricity for the grid.
Yield would make money by collecting a tipping fee for receiving the organic waste and by selling the renewable electricity it produces. But that's only part of the story. It turns out that simply burning methane converts it to CO2, reducing its atmospheric potency by 95 per cent.
The process is called "methane destruction," and in a marketplace that will soon place a value on carbon emissions, it's poised to become big business. By destroying the methane, Yield hopes to accumulate carbon credits that it can eventually sell to power generators, cement factories, steel manufacturers and other large industrial companies looking to offset their own greenhouse-gas emissions as new regulation approaches.
"It's a pretty fundamental part of our business model," says Rolfe Philip, senior vice-president of business development at Yield.
"Projects will only go ahead if there's a value to us in those credits."
And that, for Yield, is far from certain. The Ontario Power Authority, the government agency that would end up purchasing Yield's electricity under a 20-year contract, has decided that it, not developers, gets to keep all environmental attributes, including carbon credits, as part of any signed deal.
It's a policy decision that has thrown a wrench in the growth plans of Ontario's nascent biogas industry, which includes farmers looking to turn livestock manure and agricultural residue into a new revenue stream. It also affects companies looking to tap landfill gas to produce electricity.
"We have to get this sorted out before we move forward," Philip says.
Carbon trading is coming to Ontario, whether we like it or not. Amendments proposed to the Environmental Protection Act last month would give the government the authority it needs to set up a greenhouse-gas trading program in the province.
The aim is to have a cap-and-trade system in place in 2012, part of a larger strategy to reduce Ontario greenhouse-gas emissions to 6 per cent below 1990 levels by 2014 and 15 per cent by 2020.
Ontario, which, along with three other Canadian provinces and seven American states that are part of the Western Climate Initiative, is designing its program to mesh with emerging regional, national and North American trading systems.
All are likely to align with the cap-and-trade program being proposed in the United States as part of the Waxman-Markey energy bill, and all will be learning from the mistakes and successes of the European Union, which has operated a carbon-trading system since 2005.
"It makes no sense to reinvent the wheel every time," says Michael Barrett, a lawyer at Bennett Jones LLP and an expert on carbon trading. Under such a system, a central authority sets a limit on how much CO2 (or the equivalent) a company can emit during a given year. If a company comes in under its limit, it earns carbon credits that can be sold to a company that has exceeded its limit.
Credits can be bought and sold the same way we trade stocks, and, like shares, prices are set in the open market. Over time, the cap on sector emissions is lowered with an eye to meeting the government's long-term reduction targets.
Putting a price on carbon forces a change in company spending behaviour, or at least that's the theory. If a steelmaker knows it will have to pay $10, $20, $50 or even $100 for every tonne of CO2 it emits beyond its annual cap, it is more likely to make the kind of investments in energy efficiency or renewable energy that have been avoided in the past.
If such investments are deemed too expensive, it can instead buy surplus credits in the carbon marketplace from companies that have reduced emissions below their own annual cap.
"A cap-and-trade system can stimulate the development and deployment of the low-carbon technologies that will be needed for the transition to an economy that generates economic growth and new job creation in Ontario, in addition to lower emissions," according to a government discussion paper released this month.
To help sectors prepare for what's coming, the government is expected to recognize certain carbon "offsets" ahead of the 2012 launch. This is where project developers such as Yield Energy hope to play a major role.
By pursuing projects that clearly show reductions in greenhouse-gas emissions, Yield and others can earn carbon credits and sell them as offsets to companies facing hard emissions caps in 2012. The rules will likely let companies "bank" their offsets and apply them in later years as a way to meet their targets.
Offset projects can reduce emissions in a number of ways, including through reforestation, improved agricultural practices, renewable energy development, or energy conservation — as long as the results can be verified. In Yield's case, that means turning organic waste into biogas and then electricity.
Like Ontario, the federal government is counting on offsets to ease the transition to a cap-and-trade world. Environment Minister Jim Prentice said last week that Ottawa will also be establishing a carbon offset market, starting January 1, 2011, that will be aligned with what Ontario and other provinces are doing.
"It's just smart policy," says Barrett, adding that offset trading offers a trial run for industry before the official cap-and-trade system starts up. "The more experiences that can be provided to participants in this market, the better."
There's one problem. Many of the best carbon-offset projects involve the generation of renewable power, and selling power in Ontario means signing a 20-year contract with the province's power authority under a new "feed-in tariff" program being introduced this summer.
The agency has made clear that if Ontario ratepayers are going to pay a healthy premium for wind, solar, biomass and hydroelectric power then the government expects to keep all carbon credits associated with such generation projects.
Jim MacDougall, the power authority's manager of distributed generation, argues that developers aren't being forced to sign contracts. "There's nothing stopping them from doing their own thing."
He says the high rates being paid – up to 80.2 cents per kilowatt-hour for solar, 14.7 cents for biogas, 11.1 cents for landfill gas, and 13.5 cents for wind – are designed to ensure that developers get a reasonable rate of return. In other words, the value of carbon credits is factored into the rate.
Lisa DeMarco, a partner with law firm Macleod Dixon LLP in Toronto and an expert on emissions trading, says the government appears to be contradicting itself. The Ministry of Environment, in its June discussion paper on cap-and-trade, specifically mentions biogas and landfill gas projects as obvious candidates for offsets.
DeMarco says renewable-energy projects should qualify for carbon credits because they displace fossil-fuel generation. But biogas and landfill gas projects are unique in that credits can also be earned for methane destruction.
The power authority, by paying a premium for green power, might have a case for keeping the carbon credits related to electricity displacement, experts say. But as far as DeMarco is concerned, methane destruction is a completely different story.
"There's a clear scientific and technical distinction between methane destruction and indirect electricity displacement," she says.
"It's absolutely critical that at least the methane destruction credits remain with the project developers, because these credits assist greatly in financing equipment that has nothing to do with electricity generation."
The power authority, however, is holding firm. And that has Yield Energy and other biogas companies worried about their future. They can't make their offset projects viable without selling the electricity they generate, but in order to sell their electricity they have to forfeit potentially valuable carbon credits.
It's a no-win situation, one that could result in fewer, not more, green energy projects being built across the province.
"All we're asking for is fair treatment," says Yield's Philip. "Show me a windmill or solar panel that destroys methane."