Generic financial valuation of methane extraction from South African coalmines with regard to the clean development mechanism of the Kyoto protocol

Abstract

During December 1997, 160 countries reached a historical agreement on limiting greenhouse gas (GHG) emissions in Kyoto Japan. In comparison with the United Nations Framework Convention on Climate Change (UNFCCC) at the Earth Summit in June 1992 that only committed Annex I countries to "aim" to stabilise emissions of carbon dioxide and other GHG's at 10 % below their 1990 levels by 2012. The Clean Development Mechanism (CDM) was developed to include developing countries in the final convention while protecting their potential for economic growth and enabling them to commit themselves to emissions reductions on a voluntary basis. The CDM is a clean technology or financial transfer to a developing country. An international institution must validate this transfer, linked to a project contributing to the global effort, in order to obtain emission reduction credits in exchange. One of the main purposes of the CDM is to assist developing countries in sustainable development. The importance of the South African coal industry is unquestionable. Not only does the South African coal mining industry provide South Africa with a core energy source but also with important externally gained revenues. Coal is becoming a less accepted form of energy due to its impact on the environment. The coal mining industry in South Africa could offer Annex I countries and companies a cost effective way of achieving certified emission targets (CER' s) by investing in coal bed methane abatement projects. This will bring to South Africa cleaner technologies and financial support with the main focus on environmental improvement. It will also improve the environmental reputation of the coal mining industry in South Africa that might have added financial benefits for the industry.

A number of variables influence the viability of methane extraction from South African coalmines. This can be expected as the economics of climate change is still evolving. The most influencing variables on the viability of methane extraction are risk based. Political and financial risk will always influence decision-making on CDM investment in Non-annex I countries. Putting a price on greenhouse emissions will put more of a focus on energy input into processes. Those who are inefficient in energy use will pay more, those who are efficient in energy use will save. The price on methane emissions from coalmines will tend to favour those producers who tend to have a more holistic view to the resources they are exploiting. Financial costs of recovering coal bed methane might be problem today, but keep an open mind because the situation is likely to change rapidly in coming years. Advise to the coalmine industry in South Africa is to see the opportunities of the Kyoto Protocol as a "No Regret" option. South African coalmines should assess their potential methane volumes that can be extracted, the potential value and cost of capturing methane and coalmines should follow market trends in GHG trading. As the CDM develops, a number of major projects will probably proof especially profitable, but only the first Annex I investors will be able to take advantage of them. These opportunities will have to be snatched up quickly. A "jam effect" may develop thereafter, once the use of this mechanism (theoretically the most beneficial) has become widespread. Methane emission CDM projects on South African coalmines offer opportunities for Annex I countries in achieving CER's. GHG's as a commodity will change the way that we think about business.