Friday, July 06, 2007

The Price is Wrong

European Carbon emissions credits cost much more per ton than hard wood pulp wood does in Mississippi.

European Carbon emissions credits cost over 20 Euros per ton of CO2

Carbon Market Overview

Market Vintage Last
EU ETS (€) 2008 21.70
EU ETS (€) 2009 22.02
EU ETS (€) 2010 22.40

All prices per tonne of CO2

Hardwood pulp wood costs about $8 an English ton in Mississippi so about $8.80 per metric ton.

Recall my post (where I assumed absurdly that wood is almost all cellulose).

Carbon could be sequestered by burying the wood in the desert in permafrost or sinking it deep in the ocean. How much would this process have to cost to make it a less attractive option than reducing carbon emissions in Europe ?

First I have to convert the weight of wood to dry weight as water contains no carbon
Pine appears to be relatively wet and anti pine advertisers claim its moisture content is 50 - 55%. The terminology is strange and this means it is about one third water. (moisture content is defined as water/non water not water/total. I think dry weight = two thirds of weight is a generous allowance

I still think wood is mostly cellulose and water so the dry weight is hydrocarbon weighing 38 grams per mole of carbon so pulp wood would weigh about 57 grams per mole of carbon. CO2 weighs 48 grams per mole of carbon, that is, 48 tons per million moles.

At the moment the exchange rate is $1.3597 per euro so the European credit implies the cost of a million moles of carbon in 2008 is $ (1.3598)(48)(21.70) = $ 1,416.37

The cost of the same million moles in pulp wood in mississipi is very roughly
$ (57)(8.8) or about 500 dollars per million moles.

Pulp wood is far from the cheapest plant material around. I just don't see how transportation to someplace dry or cold could cost enough to make biosequestration of carbon uneconomical.

OK I have more. How much does it cost to ship a ton of coal from the powder river basin (Wyoming and Montana) to destination (seems to be average over all users). Currently it costs about $15 an English ton. Now there is lots of wood nearer to deserts in the USA than power plants using powder river basin coal are to the powder basin, but even using $15 a ton to ship and suquestering pulp wood not agricultural junk, biosequestration would be profitable if it were part of the European carbon emissions trading system.

pulled back comment

8.80+16.50= $25.30 total cost to buy this wood pulp and get it to someplace to sequester is.

Factor that total price into your mole equivalence equation by multiplying by 57/48 and you get $30.04 as the price to buy and transport the wood pulp equivalent to a metric tonne of CO2 emissions.

The dollar price of that tonne of CO2 permit is $29.82 at the current exchange rate according to xe.com.

So no arbitrage. We're also talking about massive amounts of wood. Surely the actual sequestration would have *some* marginal cost, and getting the marginal cost close to zero would probably require a large initial capital investment. It would not be profitable to do this if your arbitrage play were to narrow the gap quickly. You'd need to get a huge amount of wood pulp sequestered to make this arbitrage worth playing. So it's almost certainly going to wait until there's a sustained large gap in this price. Then there are also the transaction costs involved in getting the EU to recognize that you have in fact sequestered that much carbon.

There's a further problem in that this would only actually reduce emissions by the full tonne if the wood pulp would all have been burned. Since it's destiny is probably to be turned into paper or building materials, it seems likely that some of it doesn't get burned ever, and even if it does, it may be burned by an entity that attempts to use some or all of the CO2. In any event, it will probably be burned by someone who is paying for emissions permits. So it would seem to be a huge waste of effort to actually do this, and an intelligent regulatory scheme would not give someone sinking wood pulp full credit for carbon sequestration, IMO.

That said, it seems quite likely that the possibility of this and other sequestration arbitrages represent a floor to the price of CO2 emissions, and may be largely responsible for the current price, since in their deep wisdom the Eurocrats opted to set such high caps and not auction permits.
# posted by Michael Sullivan : 9:29 PM

Thanks Michael Sullivan. I was sloppy, of course. The reason I think that taking wood pulp to the desert could be profitable at current prices, is that wood is available in lots of places and there are lots of acres of desert so the shipping cost should be much less than for coal in Wyoming and Montana. Coal shipping is part of an effort to get the free energy in coal to our houses as electricity. Power plants should be close to users as some of the energy becomes heat and more becomes very long wave electromagnetic radiation as it goes over the power grid. Coal is found where it is found (average shipping costs for Appalachian coal are much lower). In contrast, there are national forests currently being repeatedly clear cut fairly near deserts (the price in Mississipi was the first I found but it would be best to haul from the rockies to the desert). Thus shipping costs should be much less than the number I gave and profits possible so long as the stuff basically just had to be dumped in a dry place.

3 comments:

Michael Sullivan said...

8.80+16.50= $25.30 total cost to buy this wood pulp and get it to someplace to sequester is.

Factor that total price into your mole equivalence equation by multiplying by 57/48 and you get $30.04 as the price to buy and transport the wood pulp equivalent to a metric tonne of CO2 emissions.

The dollar price of that tonne of CO2 permit is $29.82 at the current exchange rate according to xe.com.

So no arbitrage. We're also talking about massive amounts of wood. Surely the actual sequestration would have *some* marginal cost, and getting the marginal cost close to zero would probably require a large initial capital investment. It would not be profitable to do this if your arbitrage play were to narrow the gap quickly. You'd need to get a huge amount of wood pulp sequestered to make this arbitrage worth playing. So it's almost certainly going to wait until there's a sustained large gap in this price. Then there are also the transaction costs involved in getting the EU to recognize that you have in fact sequestered that much carbon.

There's a further problem in that this would only actually reduce emissions by the full tonne if the wood pulp would all have been burned. Since it's destiny is probably to be turned into paper or building materials, it seems likely that some of it doesn't get burned ever, and even if it does, it may be burned by an entity that attempts to use some or all of the CO2. In any event, it will probably be burned by someone who is paying for emissions permits. So it would seem to be a huge waste of effort to actually do this, and an intelligent regulatory scheme would not give someone sinking wood pulp full credit for carbon sequestration, IMO.

That said, it seems quite likely that the possibility of this and other sequestration arbitrages represent a floor to the price of CO2 emissions, and may be largely responsible for the current price, since in their deep wisdom the Eurocrats opted to set such high caps and not auction permits.

John Quiggin said...

I agree that it doesn't look a huge arbitrage opportunity. Still, this kind of calculation implies that the supply of offsets is going to be pretty elastic at prices around $20 euros/tonne

mw said...

Found you from the Jon Swift EOY wrap up, so a little late to the party. But I was curious about this kind of question, and interested to see your calculation. Nicely done.

I've been thinking about a variation on this theme that I probably will never do the math on, so I'll just pass along in case you or anyone else is inclined to add another chapter/post.

The question is this - Instead of burying wood, what about burying newspapers that are now being recycled?

I know this sounds counter-intuitive, but it points to a structural conflict in "green" conventional wisdom. Trying to "fix" global warming through carbon sequestration can undermine other "green" practices.

Recycling paper seems like a no-brainer. Yet the practice requires energy consumption and is a net contributor to global warming. Plus all tht carbon is kept circulating where it can get back to the atmosphere. If carbon sequestration is a priority, we should actually be cutting those trees, making paper, and burying the paper in landfills. I suspect that taking paper destined for recycling and burying may actually produce an arbitrage opportunity due to the carbon savings on both ends. Infrastructure is already in place for collection and transport of the paper - so no new net greeenhouse gases are consumed for transport if the paper is simply diverted from a recycling center to a landfill.

Just to be clear, I think that burying paper that would otherwise be recycled is a stupid idea, but quantifying the carbon benefit of the practice may point to the fallacy of carbon sequestration as a solution.