Paying off our global warming sins

Mark Trexler, president of Trexler Climate and Energy Services in Portland, Ore., an early pioneer in the field of carbon offsets who has been working with companies to fight climate change for 17 years, has reservations about the practice of retailing carbon offsets to consumers. "It's a 'buyer beware' world," he says. He's especially skeptical that carbon offset marketers can justify their claims that the projects they're supporting are truly "additional." That's industry jargon for beyond business-as-usual. Would some of the companies trading their credits on the Chicago Climate Exchange have made those CO2 reductions if carbon offset companies weren't around to buy them? Would those renewable energy projects, like wind farms, have happened without the market for the sale of those greenhouse gas reductions?

If a carbon reduction would have happened without the support of a market for that reduction -- as a result of a government regulation, cost saving or just business experimentation -- then it's not additional. "There's an awful lot of wind plants being built that have the ability to generate renewable energy credits," says Trexler. "But most of these wind plants would have happened anyway. The existence of a voluntary greenhouse gas market is not what is making these wind farms go," he says. Rather, it's high natural gas prices and state and federal subsidies for wind power. "All these groups are trying to do the right thing," he adds. "But there are some real market barriers to making it possible to take small amounts of money and convert them into credits that are truly additional." That is, without large numbers of people participating in the carbon-neutral market right now, it's difficult to generate truly additional projects.

All this confusion about the impact of the projects underscores the need for a standard set of validations. "There isn't a set of rules yet for these carbon retail products. There should be. We need it," says Gabe Petlin, senior manager of regulatory affairs for 3 Phases Energy, a wholesaler of renewable energy certificates. Trexler believes it is possible to identify current projects that are truly additional and focus investment on them, yet it would be hard to come up with rules that apply to all projects. He compares additionality to the Supreme Court definition of obscenity: You know it when you see it. Some projects clearly would never have happened without the carbon-offset market, like burning or "flaring" methane leaking out of abandoned, unregulated coal mines. Other reductions might occur without the carbon-offset market, and now simply stand to get a cash boost from it. Most projects lie somewhere in the murky middle.

In the meantime, carbon-neutral groups pledge that they conduct their own due diligence. "When we select our projects, we talk to every project developer, and talk to them about the cash flows of the project, and we make our own internal decision about whether these cash flows are material to the projects," says Arnold of TerraPass.

To back up their own research, carbon-offset groups hire nonprofit, third-party auditing firms. "I think that consumers purchasing certified, verified renewable products in the voluntary market can be confident that their money will result in more renewable projects being built in the future," says Jan Hamrin, president of the Center for Resource Solutions in San Francisco, one of the top certifiers. For almost a decade, her nonprofit has been in the business of scrutinizing Recs, checking the books and marketing claims of firms selling them. They're now developing a similar certification for carbon offsets, which should be ready by the end of the year. Environmental Resources Trust, started by Environmental Defense, actually does site visits to carbon-offset projects, such as methane digesters on dairy farms, to see if they're doing what they say that they are, as well as analyzing the firms' books.

It's indicative of the industry's growing pains that the two groups don't agree on what constitutes a legitimate offset. The Center for Resource Solutions says it's fair to calculate a carbon reduction based on renewable energy, like wind, fed into the grid. Here's how it's done: Figure out which grid the renewable energy went into, and consult federal data to determine how dirty that grid is. (Some grids are much more carbon-intensive than others, depending on the mix of coal, natural gas, hydroelectric and other sources of power.) Then, estimate the amount of carbon offset by the wind energy, based on the number of megawatt hours of it sold into that dirty mix.

Environmental Resources Trust doesn't see it that way. It says that polluting companies, like American Electric Power and Duke Energy, which both trade on the Chicago Climate Exchange, could theoretically claim the same reduction as a wind power producer operating on the same grid, resulting in double counting of the same carbon reduction. Imagine a wind farmer sells renewable energy onto the grid, and sells Recs that claim an amount of CO2 that's been reduced because of that clean energy production. Then, a power company on the same grid burns less coal because of the clean energy from the wind farms, and notices reductions in CO2 pollution coming out of its stack. So, the power company can turn around and claim that reduction on the Chicago Climate Exchange, selling the credit to someone else. To avoid that scenario, some wind producers state in their contracts with utilities that the wind farmer can make the carbon-claim, not anyone else.

In a regulated market, many of these problems would be sorted out. The carbon reduction would be assigned to either the wind farmer, who created the clean energy, or the utility, where reduced emissions occurred. In the Northeast, where regional regulations of C02 are set to go into effect before the end of the decade, renewable energy producers are now lobbying hard for the right to make that carbon claim. In the rest of the country, Evan Ard, spokesperson for Evolution Markets, a broker of environmental commodities in White Plains, N.Y., says the interested parties are unlikely to sort out these differences among themselves. In early May, the industry held a conference in New York to discuss how to make the markets more transparent for consumers, companies and traders who want to buy and sell credits. Yet, after the event, Ard wasn't convinced that the industry could come up with a voluntary set of rules, which everyone would agree to abide by. "There will never be a clear standard," he say. "The only person who can set a clear standard is the government."

So far, the Environmental Protection Agency has been no help. There's nothing like a USDA Certified Organic stamp for carbon offsets. After all, there's no federal regulations on carbon dioxide emissions from polluting industries. So it's not surprising that the feds have not leapt in to monitor the ones being sold to consumers. Multiple representatives from the agency refused to comment.

Yet with such an intangible product -- the reduction of a gas that can't be seen, tasted or smelled -- and prices that vary from $5.50 a metric ton to $30 a metric ton, marketing competition among the groups selling them can get heated. Earlier this year, when Carbonfund bought renewable energy certificates that had been generated by the Rosebud Sioux Tribe Wind Turbine Project from a third party, and bragged about it on its Web site, NativeEnergy was not amused.

NativeEnergy, which develops renewable energy projects, is majority-owned by the Intertribal Council on Utility Policy. The Rosebud Sioux Tribe Wind Turbine Project was one of its first and most high-profile undertakings. "They did not earn the right to use the tribe's name or project because they did not buy from the tribe, but that's what their materials said, and that's misleading," says Billy Connelly, marketing director for NativeEnergy. A lawyer for the Rosebud Sioux Tribe asked Carbonfund to take down the references on the Web site, which it did, but the original press release announcing the purchase still lives online. "Carbonfund purchased 625 megawatt hours renewable energy certificates generated by the Rosebud Sioux Tribe wind turbine," says the Carbonfund's president, Eric Carlson. "That is not in dispute. Clearly, you have several high-priced groups that are trying to protect their position in this little market."

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