A carbon trader who lost faith

A carbon trader who lost her faith
Pioneer warns Canada to avoid Europe's mistakes

Nathan Vanderklippe
Financial Post
Saturday, January 27, 2007
VANCOUVER - For more than a decade, Aldyen Donnelly has worked with the companies environmentalists love to hate. They are the corporations often accused in the court of public opinion as the villains of climate change: power suppliers and petroleum producers like Trans Alt aCorp., Ontario Power Generation and Trans Canada Pipelines Ltd.
Since 1996, she has advised 14 of them, each among Canada's top 20 producers of greenhouse gases. It may seem an odd fit for a dedicated environmentalist and ardent believer in global warming to draw her salary from the very emitters who are just as likely to deny that science. But the standard definition of "environmentalist" hardly fits Ms. Donnelly, who has carefully scrubbed the word "green" from her vocabulary in her bid to reform her clients.
She has argued instead that whittling down emissions ahead of coming greenhouse caps is an issue of risk management, and every bit as important as hedging against bad weather.
In so doing, she has helped lay some of the legal and theoretical foundations that will guide Canada's industry as it responds to the mandatory emissions targets Ottawa is drafting. And she has helped to devise a message that some companies --Trans Alta Corp. in particular --now use as a guiding principle. "Our underpinning strategy is we believe it's better to establish your bank of compliance instruments early, rather than wait for the rules to be put in place and everything goes nuts and the price goes wild," said Don Wharton, the company's director of sustainable development.
It's not a belief shared by all of Ms. Donnelly's clients -- some of whom have preferred to wait until they have actual targets to work toward.
But her work in establishing the principle of emissions as economic risk has earned her a reputation as a "pioneer" and a "maverick" whose unflinching commitment to her beliefs is nonetheless seen by some colleagues as narrow-minded arrogance.
She is nonetheless an unapologetic contrarian, and today she is preaching another disputed view: that the emissions trading markets she once saw as the glittering hope for companies in need of greenhouse reduction credits are bunk.
"They're expecting us to exchange Canadian dollars for Zellers coupons," she said.
She says markets such as the European Union's emission trading scheme, which in 2006 saw ?17.8-billion ($27.3- billion) in trades, are primed to crash -- their currency in trade, carbon credits, nearly useless because the market has been oversupplied with allocations by politicians wary of harming industry with deep emissions cuts.
And that conclusion, reached from years of watching the market, could help shape Canada's policy because, according to insider, "she's consistently had the ear of senior political people and, as far as I'm aware, she continues to have the ear of some people in the PMO."
A life-time Vancouverite, Ms. Donnelly, 52, began her work in drafting the history of emissions trading in Canada in 1994 when she took a contract to consult for West coast Energy, which is now owned by Duke Energy Corp.
Worried about the possibility of government-imposed emissions guidelines, many corporations had begun to conduct greenhouse gas inventories, and Ms. Donnelly soon began to participate in weekly conference calls with others in the industry who were trying to prod their superiors into cutting emissions.
"All this was lower management conspiring against their bosses," she said.
As their ideas began to coalesce, they realized they were duplicating each other's work. The solution: form a coalition of companies that, in the marketplace, were fierce enemies but had common needs when it came to responding to emissions pressure. Gemco, the greenhouse emissions management consortium, was born on April 14, 1996, with Ms. Donnelly as its president.
The members soon determined the best way forward was to buy credits from other companies who could meet their compliance obligations more cheaply. In other words, it might cost a power producer $35 per tonne of emissions saved to convert a coal-fired power plant to natural gas. If someone else could reduce emissions at a cost of $5 a tonne, the power producer could simply pay for that reduction, then sign a contract giving it credit for the lowered emissions, all at a far lower price.
But given there was no Canadian precedent for this, how exactly would it work? They decided the only way to figure that out was to do it. Ms. Donnelly settled on a wallboard plant in Surrey, B.C., that was drawing part of its energy from methane captured at a nearby landfill. She found an engineer who could double the plant's use of methane, thereby reducing much of the gas released into the atmosphere, and she began to draft the contract.
That document -- which guaranteed credit for the buying companies and imposed penalties if the wallboard plant did not follow through -- was the first of its kind signed in Canada. It became a template used by industry in similar deals, and led to other firsts.
"I did the first agriculture [carbon trading] deal in the world and I did the first carbon dioxide capture and injection to enhance oil recovery [for emissions purposes] in the world," said Ms. Donnelly.
By 2003, Gemco and its members had become the world's third-largest buyer of carbon credits. To date, carbon trading projects Ms. Donnelly has worked on have led to an estimated 50 megatonnes of greenhouse gas reductions.
But Ms. Donnelly has grown disillusioned with those markets, and today counsels the companies she works with -- a list that has dwindled to New Brunswick Power, Nova Scotia Power and Trans Canada Energy, as many companies take what they have learned from Gemco and go it alone -- to avoid international carbon exchanges completely.
And, she said, as Canada draws closer to establishing its own emission restrictions, Ottawa can avoid the mistakes made by Europe -- whose carbon market has been volatile, based in part on over-allocation of credits to emitters -- by refusing to develop a market here.
Companies desperate to meet compliance targets will develop a carbon exchange on their own, she said, just as they did with the futures markets that allow industry to offset other types of risk.
"I'm shifting my recommendations dramatically," she said. "I'm very close to saying that in Canada the government should absolutely not participate in any way in the construction of any infrastructure to support a market system. Just regulate."
Many in Canada -- especially those who work with international carbon markets -- say as those exchanges get past their growing pains, they will become mature trades that this country should attempt to replicate. But Ms. Donnelly, with the acidity that has made her both influential and controversial, disagrees.
"We don't need government to issue certificates or run a registry. Every time someone from a major exchange tells me we need that I feel like tearing my hair out," she said. "If Canada makes the same mistakes in our design that Europe and the U.S. made ? it's a disaster."
nvanderklippe@nationalpost.com
© National Post 2007

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