Robert Day, 33, a venture capitalist, walks to his office in downtown San Francisco every day. But when he has meetings down south in Silicon Valley, he drives the family's 2001 Subaru Forester, which gets around 23 miles per gallon. Between his meetings, his wife's meetings, trips to the grocery store, and the occasional getaway to Napa or Carmel, this one-car family drives their Subaru about 8,000 miles per year, 4,000 fewer than the national average.
As a venture capitalist for Expansion Capital Partners, a firm that invests in clean technologies, Day's all too aware that his purring engine makes an incremental contribution to global warming. Burning one gallon of gas emits 20 pounds of carbon dioxide into the atmosphere, and in one year, the family Subaru gives off about 6,400 pounds of the greenhouse gas.
But a decal on the back window of Day's Subaru attests that he's done something about it. He's paid $39.95 to a Silicon Valley company called TerraPass to "offset" the CO2 emissions from his car. His money is going to help fund wind farms and reduce the methane leaking out of dairy farms and landfills. By paying to boost alternative energy and cut pollution, Day is neutralizing the greenhouse gases coming out of his own car. He can't put the C02 genie back in the bottle. But he can help jump-start a new way to arrest global warming. Buying carbon offsets is a small gesture, Day says, "but it's a lot better than standing still. It's certainly better to do this than to do nothing."
In the past few years, more than a dozen carbon-neutral companies have popped up to sell the promise that you can mitigate your contribution to global warming, whether your contribution comes from commuting to work, catching a flight for a summer vacation, or just keeping the air conditioning running during those ever hotter summer months. One U.K. company is even promoting the idea of offsetting your baby's disposable diapers. TerraPass's competition includes Carbonfund, NativeEnergy, Certified Clean Car, DriveNeutral and Atmosclear Climate Club.
The new wave of carbon-neutral groups appeal not only to green V.C.s. Last December, Whole Foods announced it offset all of the electricity used in its operations, a claim sure to appeal to the grocer's eco-minded customers. The National Football League has offset the carbon created by the 2005 Super Bowl, while the Winter Olympic Games and a Dave Matthews Band tour have taken steps to go carbon neutral. At the end of Al Gore's global-warming documentary, "An Inconvenient Truth," a NativeEnergy logo on the screen trumpets that all the CO2 emitted by the shooting and editing of the film has been offset. In other words, the global warming caused by the making of a film about the horrors of global warming has been neutralized.
But is going carbon neutral the right path to reducing greenhouse gases? The early reviews by energy experts are mixed. On the positive side, buying offsets goes beyond fretful hand-wringing about government inaction and fist-shaking at polluting industry. Calculating personal greenhouse gas emissions makes people more aware of the ways their own daily activities contribute to the problem. Buying an offset allows them to take an immediate, concrete step, something more than writing a check to an environmental group or sending an e-mail to a congressman.
On the negative side, the best way to fight emissions is to prevent them in the first place, not offset them after they've occurred. Some critics worry that offsetting will encourage guilt-free consumption and shift the focus from conservation. Plus, the number of people willing to pay to offset their carbon footprint is so far small -- the carbon-neutral groups together have customers in the low tens of thousands. The groups themselves, some of which operate as for-profits others as nonprofits, vary in quality and effectiveness, causing observers to warn, "Buyer beware." Other critics say the carbon-neutral movement is a poor substitute for the powerful hand of government.
In any event, understanding the pros and cons of the carbon-neutral groups requires a brief lesson in carbon trading.
Today, with the Bush administration asleep at the wheel of a warming planet, more than 100 companies that spew carbon dioxide, including Ford, Dupont and Motorola, voluntarily participate in the Chicago Climate Exchange. The exchange is a kind of experimental environmental marketplace, in which companies agree to lower their greenhouse-gas pollution every year. Municipalities, waste-management firms, universities and coal-fired power producers also participate. If a company reduces its greenhouse gas emissions more than the amount that it has agreed to, it generates a credit, which represents -- in metric tons -- the amount of reduced carbon dioxide. On the exchange, it can sell those credits to other companies that may not have met their annual target, so they too can be in compliance.
Companies can also sell the carbon credits to TerraPass, Carbonfund, DriveNeutral and the like. This merry new band of environmental middlemen buy the credits with your money and then retire them. That puts the credits out of commission for good and, ideally, forces the companies that would have otherwise bought them to reduce emissions the old-fashioned way, like upgrading pollution controls. Or, it raises the price of buying a credit from someone else, since with fewer credits available to purchase, the cost of each one should go up. Carbon-neutral groups provide the polluters with an old-fashioned incentive to cut emissions: money. With carbon-neutral firms waiting in line to buy credits, the companies have all the more reason to produce them. For the carbon-neutral groups, the economic principle is simple: If you want companies to clean their act, pay them to.
The carbon groups trade in other measurements of pollution reduction, too. One is called renewable energy certificates, "Recs," which correspond to megawatt hours of electricity generated from renewable sources that don't emit greenhouse gases. For the most part, the carbon-neutral groups buy Recs from wind power plants. The wind farmers sell their energy to utility companies, replacing some of the power that would otherwise be generated by fossil fuels. Again, the idea is that an increased demand for Recs will help alternative energy plants flourish and utilities cut back on the greenhouse gases. Whole Foods brags that it bought 458,000 megawatt-hours of Recs, the largest purchase of wind energy credits in the history of the U.S. and Canada.
Some of the groups also sell carbon neutrality by underwriting the planting of trees around the world. As you recall from high school biology class, trees, in the process of photosynthesis, absorb carbon dioxide from the atmosphere. The groups also sell the chance to reduce other greenhouse gases. One method involves dairy farms' converting the methane (a greenhouse gas more than 20 times as potent as carbon dioxide) produced by cow manure into electricity. Another method burns methane leaking out of rotting garbage in landfills, turning it into CO2, softening its impact.
In practice, the groups refer to all measurements of pollution reduction -- from Chicago Climate Exchange credits to tree planting -- as carbon offsets. Some of the groups let you choose which type of offset you want to buy, while others sell them as a package. There's no umbrella association to calculate how many carbon offsets have been sold to date and how much pollution they've reduced. But TerraPass, one of the most popular groups, reports that it has 6,500 customers, each paying about $50, and has raised over $300,000 for "American clean energy." It states that it has offset 79 million pounds of carbon dioxide or the equivalent of not driving 90 million miles. Americans drive approximately 3 trillion miles a year, so it's apparent at this point that the carbon-neutral business is a drop in the oil bucket. On top of that, critics say, lie the murky benefits of carbon offsets themselves.
Tree planting, for instance, is one of the easiest carbon offsets to market. After all, green customers love the other environmental benefits of trees, such as preventing soil erosion. And trees are appealing and familiar, unlike preventing gas from leaking out of landfills or manure, which is a tougher sell. Yet the easiest offsets to sell, observers say, may not be the most effective way to reduce greenhouse gases. Planting trees, they point out, won't do anything to make renewable energy available faster. Plus, planting a tree means it won't be sequestering much carbon until years in the future, when it grows. Then there's the little matter of what happens if even the most well-managed forest, say, burns down, and much of the carbon you paid to sequester is rudely released into the atmosphere.
"Even if we stop deforestation completely, it's noise on the graph of the carbon impact," says Tom Arnold, chief environmental officer for TerraPass, which doesn't deal in trees. "Clean energy production is a solution to climate change. Deforestation is a cause of climate change, and should be stopped. It's not a solution to climate change."
Renewable energy certificates are also popular with consumers and companies like Whole Foods, allowing them to claim they're offsetting their own emissions, while encouraging the growth of clean energy. Yet some environmentalists have their doubts about Recs. Environmental Defense, for one, doesnt like counting renewable energy fed into utility grids as a carbon offset.
"Not all renewable energy certificates are direct emission reductions because of the way the energy grid works," says Tom Murray, project manager of corporate partnerships for Environmental Defense. "If I buy a Rec, it means I bought a certain amount of megawatts of green power. But it doesn't necessarily mean that somewhere in the grid there was an absolute reduction in emissions for a certain period of time." Perhaps while that clean, renewable electricity was being fed into the grid, overall demand went up -- it was a hot summer requiring more electricity to keep air conditioners running -- and so more coal and natural gas were burned, too. He argues that just adding more clean energy into the mix on a grid doesn't go far enough to prove a reduction has occurred.
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."
As any environmentalist will tell you, the best way to address pollution is not to create emissions in the first place. "In my opinion, it's more effective to take action to reduce our own personal carbon footprint, driving less, insulating our homes, having more efficient automobiles," says Bill Ginn, director of the Nature Conservancy's Global Forest Initiative. "Offsets are just offsetting an emission, and if we have the opportunity to eliminate the emission, I think that's a better solution. We don't have to shiver in the dark. But the first thing is to reduce, and then if you can't do more, offsets are a potential way of addressing this issue."
Even with his reservations, Trexler thinks voluntary carbon offsets could become important. "It's worth the effort to sort out these glitches, because these markets could be very useful in promoting public education about climate change," he says. "Over time, they could grow large enough to accomplish a lot of truly legitimate CO2 reductions. At some point, they could become a very important source of significant reductions."
So what should individuals looking to not just reduce, but erase, our carbon footprints do now? "Pursuing carbon neutrality can't hurt in the short run, and if a lot of consumers demonstrate that this is a viable market, it will actually become a lot easier to develop and enforce quality standards for the market," he says. Still, he stresses, "Consumers should not view carbon neutrality as the end game. We need national and international policy to address climate change, and this will only happen with popular support through the political system."
One of the most significant national policies the U.S. could adopt is capping greenhouse gas emissions from polluting industries. Right now, the volume of trades on the Chicago Climate Exchange is low compared to the volume on the European Climate Exchange, where polluters are gearing up to meet regulations under the Kyoto treaty. With companies only participating in the U.S. market voluntarily, there's just not much buying and selling of carbon credits taking place. If the U.S. had a mandatory cap on emissions from industry -- not just voluntary ones -- it would constitute the nation's biggest step toward slowing down global warming, resulting in far greater reductions of C02 than any voluntary steps.
With mandatory trading, the price of buying carbon credits would likely go up. But that's a problem the carbon-neutral groups would love to have, since it would indicate larger greenhouse gas reductions would be taking place. Plus, the carbon-neutral groups are confident that some sources -- like methane leaking out of abandoned coal mines -- will never fall under regulation, leaving their voluntary market to provide financial incentives to clean them up.
For now, though, without federal regulation, the U.S. must rely on industry to clean up its own act. The country can also rely on people like Audrey Schulman. The 43-year-old novelist in Cambridge, Mass., has purchased offsets from Carbonfund for three years, and doesn't even own a car. A mother of a 6-year-old and a 3-year-old, Schulman says her children caused her to become "obsessed" with global warming. "I had kids and stopped thinking in terms of my own life span, and started thinking in terms of their life span," she says. "I got freaked out and started exploring climate change, and what it could do, and how to try to fight it, and carbon offsets seemed like an intelligent way to try to save some kind of future for my children." Schulman offsets all the family's electricity use and airplane travel for about $100, while also taking many steps to conserve, like line-drying laundry, using compact fluorescent bulbs, not using air conditioning and programming the thermostat in winter to go down at night.
Yes, Schulman and the V.C. who walks to work in San Francisco represent a tiny slice of the country. In fact, the Wharton business school students who launched TerraPass thought that their typical customer would be an SUV-driving mom. So far, their most common customer has been a highly educated man in his 40s or 50s, with an advanced degree, who drives a Honda Civic, a Ford Focus or a Toyota Prius, even though he could afford to drive a Porsche. SUVs and big trucks make up more than 50 percent of the cars on the road in the U.S., but they make up just 20 percent of TerraPass' members. The company boasts no fewer than 20 billionaires among its customers -- not exactly your average Joe, but also likely to have a bigger carbon footprint to offset than him, too.
As carbon-neutral proponents point out, every movement has to start somewhere. Jason Smith, 28, an MBA student at the Presidio School of Management in San Francisco, who with fellow students is one of the co-founders of the nonprofit DriveNeutral, agrees that his pool of customers now is small, about 800 at last count. But he's hopeful that they -- environmentalists and green business people eager to experiment in new markets -- will turn out to be pioneers, the early adopters who will bring the mainstream along. "Essentially, when people are buying these offsets they're saying: We recognize that every day we drive, it's causing pollution. We want to do something about it," he says. "They're saying this many people in the everyday driving market care about climate change. It's a bottom-up approach to driving cultural change."