Methane Emission Carbon Credits

By Markdale Alternatives, Investing #carboncredits, #esg, #methane 0 Comments

As the world turns towards greener, more sustainable practices, a growing market for carbon offsets has emerged, creating a powerful incentive to mitigate greenhouse gas emissions. Today, there are companies specializing in plugging abandoned oil wells and turning them into potential sources of carbon credits. Funding for these projects is coming from a combination of government and charity, with some for-profit investment. This post will describe how investors might approach this emerging carbon offset market.

From Drilling to Sealing

The US Environmental Protection Agency (EPA) estimates that there are around 3.7 million derelict oil and gas wells spread across the United States. These abandoned wells are a significant source of methane leaks, a potent greenhouse gas that has a far greater planet-warming impact than carbon dioxide.

So, cleaning and closing these abandoned oil wells is something that should be done to protect the surrounding environment. But, customers for the commodities produced by these wells are long gone. And so, who will pay for their cleanup? This is where the carbon credit market has stepped in.

How do Carbon Credits Work?

Carbon credit markets play a vital role in incentivizing the closure and sealing of old oil wells, by creating a monetizable value for the reduction of greenhouse gas emissions. Here’s how it works:

Identification and Assessment of Emission Sources: abandoned oil wells are identified that are leaking methane, a potent greenhouse gas. The amount of methane these wells are releasing into the atmosphere are assessed.
Capping the Wells: Once the wells are identified and their emissions quantified, contractors seal these wells, preventing further methane leakage.
Verification: An independent third-party entity verifies the work completed. This includes confirming that the well has been properly sealed and that the emissions have indeed been reduced or eliminated. The verification process is crucial to ensure the integrity of the carbon credits.
Creation of Carbon Credits: For every metric ton of carbon dioxide equivalent (CO2e) that is prevented from entering the atmosphere, one carbon credit is created. In the case of abandoned oil wells, the methane emissions avoided by capping the wells are converted into CO2e.
Selling Carbon Credits: These carbon credits can then be sold on carbon markets to entities (individuals, corporations, governments) looking to offset their own carbon emissions. By purchasing these credits, they are effectively funding the well-sealing operations.
Voluntary and Compliance Markets: Carbon credits can be sold on both voluntary and compliance markets. Voluntary markets cater to those who wish to offset their emissions out of corporate social responsibility or for reputational benefits. Compliance markets, on the other hand, exist due to regulations that legally bind certain entities to reduce their carbon emissions. If these entities cannot achieve the necessary reductions internally, they can buy carbon credits to meet their obligations.
Role of Regulations: Regulations play an essential role in ensuring the effectiveness of carbon credits. They govern the processes of verifying emission reductions, issuing carbon credits, and tracking their trading. In the US, for instance, the Environmental Protection Agency (EPA) is responsible for these regulations.

Critics of this system point out potential issues, such as the difficulty in accurately quantifying the emissions that a well would have released if left untouched. There’s also concern about ‘additionality’, i.e., whether the projects generating carbon credits are truly additional to what would have happened in the absence of carbon finance. Despite these debates, the carbon credit system provides an innovative financial mechanism to encourage and reward efforts in reducing greenhouse gas emissions, such as those involved in plugging old oil wells.

The Race to Plug Leaky Wells

In recent years, specialized companies have emerged with the aim of locating abandoned wells, assessing their methane emissions, and capping them to prevent further gas leakage. By doing so, they can sell their efforts as carbon credits to buyers looking to offset their own emissions.

Despite regulations requiring oil and gas companies to plug wells post-production, a significant number of wells remain improperly sealed due to the lack of enforcement and the companies’ financial inability to do so. This creates a significant opportunity for companies that specialize in abandoned oil wells.

Quantifying the Impact

These specialized companies that focus on generating carbon credits from abandoned oil wells use specialized equipment to locate old wells and measure their emissions. Currently, they focus on the most polluting sites, which are estimated to produce the equivalent of more than 2,000 metric tons of carbon dioxide per day.

Once a project is verified by environmental auditing companies and the non-profit American Carbon Registry, the carbon credits can be sold. This method of funding is gaining traction, despite some critics questioning its overall efficacy.

Funding the Clean-up

The Bipartisan Infrastructure Law passed in 2021 earmarks $4.7 billion for plugging wells. However, this will only scratch the surface of the problem. Prior to this allocation, states typically took the lead in clean-up operations, sometimes in collaboration with the Well Done Foundation, a non-profit established in 2019.

Companies like Crescent Midstream are already purchasing carbon credits from well-plugging initiatives as an effective way to offset their own emissions.

Controversies and Criticisms

Despite the progress, there are concerns over the effectiveness of emissions credits. Critics argue that it’s challenging to accurately model how much a well would leak if left untouched. Moreover, there are issues about the quality of offset transactions, with some corporate players purchasing low-quality schemes deemed useless by experts.

A Step Towards a Greener Future

Despite the controversies, many remain optimistic about the role of carbon credit markets in mitigating climate change. As a cautious approach and third-party verification, carbon credits can serve as an effective tool in stopping methane emissions. The “wild west” era of unfettered oil drilling may be over, but the new frontier of plugging abandoned wells and curbing greenhouse gas emissions is just beginning.