Behind the feel-good hype of carbon
offsets, some of the deals don't deliver
The organizers of the Academy Awards declare all
their celebrity presenters to be "carbon-neutral." Vail Resorts Inc. (MTN ) in Colorado boasts that its
chairlifts and lodges are "100% powered by wind." Seattle's municipal utility
claims that its net contribution to global warming is zero.
A growing
number of organizations, corporations, cities, and individuals are seeking to
protect the climate—or at least claim bragging rights for protecting the
climate. Rather than take the arduous step of significantly cutting their own
emissions of carbon dioxide, many in the ranks of the environmentally concerned
are paying to have someone else curtail air pollution or develop "renewable"
energy sources (see BusinessWeek.com, 2/1/07, "Ethanol:
Too Much Hype—and Corn "). Carbon offsets, as the most common variety of
these deals is known, have become one of the most widely promoted products
marketed to checkbook environmentalists.
Done carefully, offsets can have
a positive effect and raise ecological awareness. But a close look at several
transactions—including those involving the Oscar presenters, Vail Resorts, and
the Seattle power company—reveals that some deals amount to little more than
feel-good hype. When traced to their source, these dubious offsets often
encourage climate protection that would have happened regardless of the buying
and selling of paper certificates. One danger of largely symbolic deals is that
they may divert attention and resources from more expensive and effective
measures.
The market for carbon offsets in the U.S. could be as high as
$100 million, according to researchers' best guesses. That's up from next to
nothing just a couple of years ago. One reason for this growth is that the U.S.
remains one of the few industrialized countries that hasn't ratified the Kyoto
Protocol, a global agreement setting emission limits by nation. In the absence
of a mandatory national cap, some Americans have begun taking action on their
own, but without widely recognized standards as to what constitutes a valid
offset. As long as there are willing buyers and sellers, almost anything goes.
"Right now it's a no-man's land out there," says Jennifer Martin of the
nonprofit Center for Resource Solutions in San Francisco.
Hollywood
celebrated environmental activism at this year's Academy Awards, and not just by
giving an Oscar to the Al Gore documentary An Inconvenient Truth. The
Academy of Motion Picture Arts & Sciences promoted the show itself having
"gone green," by means of a variety of initiatives. One element: Each performer
and presenter received a glass statue representing the elimination of the amount
of greenhouse gas associated with a celebrity lifestyle over the course of a
year. The offsets were issued by TerraPass Inc., a two-year-old for-profit
company in San Francisco that identifies climate-protection efforts and, for a
fee, gives its customers the opportunity to buy a piece of the environmental
action. Each Oscar favor represented 100,000 pounds of emission reductions drawn
from TerraPass' portfolio of offset projects.
One of the largest in its
portfolio is a sprawling garbage dump outside of Springdale, Ark., from which
TerraPass has purchased thousands of tons of gas reductions. The vast sloping
mound of the Tontitown landfill rises near stands of bare-limbed hickory and oak
trees, with the blue Ozark foothills in the background. The decomposing trash
generates methane, a gas 23 times as potent as carbon dioxide in trapping heat
in the earth's atmosphere, melting glaciers and raising ocean levels. Waste
Management Inc., (WMI ) the
huge garbage processor that operates the facility, tends nearly 90 wells dotting
the trash mountain, each giving off a barely audible hiss as it sucks methane
from the depths of the landfill and delivers the gas to a single towering flare.
Once torched, the gas is released into the atmosphere as less-damaging
co2. But company officials and Arkansas environmental regulators
say Waste Management began to burn methane, and continues to do so, for reasons
having nothing to do with TerraPass' offsets.
'ICING ON THE CAKE' Concerned that methane
might be contaminating groundwater beneath the landfill, Waste Management first
floated the idea for a gas-collection system in early 1999. Arkansas regulators
urged the company to pursue this remedy. In 2001 the state increased its
pressure by imposing a requirement for "corrective action" at the Tontitown
facility. Waste Management promised to make the methane flare operational by
late 2001. After probes subsequently detected methane levels exceeding allowable
levels, Dennis John Burks, then chief of the Solid Waste Management Div. of the
Arkansas Environmental Quality Dept., wrote to Waste Management on June 27,
2001, saying that the state "strongly urges WM to bring the newly installed
Tontitown Landfill gas extraction system online as soon as
possible."
Asked about Waste Management's response, Gerald Delavan, a
supervisor at the Arkansas environmental agency, says: "It started out as a
voluntary effort" by the company. "But it ended up being guided by corrective
action,'" imposed by the state. Wes Muir, a Waste Management spokesman, says:
"We felt a gas collection system was the most effective way to deal with
this.... It was a voluntary process."
Regardless of who deserves credit
for taking the initiative, one thing is clear: The methane system was launched
long before any promise of carbon-offset sales. In other words, it appears that
the main effects of the TerraPass offsets in this instance are to salve guilty
celebrity consciences and provide Waste Management, a $13 billion company based
in Houston, with some extra revenue.
All six other project developers
selling offsets to TerraPass that BusinessWeek was able to contact said
they were pleased with the extra cash. But five of the six said the offsets
hadn't played a significant role in their decision to cut emissions. "It's just
icing on the cake," says Barry Edwards, director of utilities and engineering at
Catawba County, N.C., which installed a system in 1998 to turn landfill gas into
electricity to power 944 homes. "We would have done this project
anyway."
A big player in the growing industry of brokers and retailers
marketing offsets, TerraPass was the brainchild of Karl Ulrich, a professor at
the Wharton School. Ulrich, an environmentalist who bikes to work, became
concerned several years ago about the carbon dioxide emitted when he drove to
his cabin in Vermont. In the fall of 2004 he gave one of his classes $5,000 and
challenged students to create an affordable carbon-offset
program.
TerraPass, with a number of Wharton graduates as shareholders,
has soared since then. The company now claims 42,500 customers. Tom Arnold, the
30-year-old former Ulrich student who runs the business, says TerraPass has
already had a major impact by offsetting more than 117,000 tons of greenhouse
gases. Ford Motor Co. (F ) and
the travel Web site Expedia.com (EXPE ) collaborate with the
offset-retailer to offer customers the option of neutralizing travel-related
emissions for an added cost.
TRICKLE
DOWN Arnold concedes that TerraPass hadn't known until
approached by BusinessWeek that concerns about groundwater
contamination had led to the Tontitown methane project. TerraPass, he says, will
now rethink how it evaluates such landfill gas-reduction efforts. But Arnold
stands behind the legitimacy of offsets related to the Tontitown dump. He
emphasizes that Waste Management acted voluntarily, and he praises an $800,000
upgrade to the methane system last year: "That's behavior consistent with
somebody trying to enhance methane capture." He also warns against getting too
bogged down in the intricacies of how particular offset projects were conceived.
"Let's get the market working well," he says. "That will do a lot of greater
good."
As the offset market now works, intermediaries typically pocket a
big portion of the money coming in. Consider two projects in the TerraPass
portfolio that are run by dairy farmers in Princeton, Minn., and Lynden, Wash.
Several years ago, the farmers had installed expensive equipment that uses
methane from cow manure to generate electricity. In theory, the promise of
offset income encourages farmers to invest in such equipment. TerraPass
typically sells offsets for about $9 per ton of carbon dioxide, or the
corresponding amount of methane. The company takes a cut of that $9, but won't
say what the percentage is. A broker that introduced TerraPass to the dairy
farmers also took a cut. In the end, the farmers say they each received less
than $2 a ton out of the original $9. Darryl Vander Haak, the farmer in
Washington, says he's happy with the $16,000 he earned last year from offset
sales. But offsets didn't factor into his decision to start the methane venture,
he adds.
TerraPass' Arnold nevertheless maintains that "the [offset]
prices out in the market now are changing behavior." The fees intermediaries
collect cover costs such as auditing projects and marketing to buyers. "It's
much like Starbucks (SBUX ),"
Arnold says. "What do you think Starbucks pays for a pound of coffee, and how
does that translate into a $3.50 latte?"
Seattle, the home of Starbucks,
made an astounding announcement in 2005: Its municipal utility, Seattle City
Light, had eliminated its contribution to global warming. The power company
still annually spewed some 200,000 tons of greenhouse gases. But Seattle said it
had negated every last ton by paying other organizations around the country to
curtail their emissions. "We can power our city without toasting our planet,"
Seattle Mayor Greg Nickels declared.
But as in the case of the Oscar
presenters, the bulk of the pollution reductions for which Seattle paid would
have happened regardless of its offset deal. The city's experience illustrates
the difference between more expensive methods of cutting greenhouse gases close
to home, vs. more far-flung deals with third parties.
In 2000 the Seattle
City Council imposed the long-term goal of Seattle City Light becoming
carbon-neutral. At first the utility pursued local projects, such as one in 2003
with Seattle's municipal trucking department. The strategy was to convert 900
diesel vehicles to a more climate-friendly blend of fuel containing 20%
biodiesel. The blend was expected to cost an additional 25 cents a gallon, so
Seattle City Light agreed to chip in half of the difference. In exchange, the
utility has taken credit for the relatively modest 700 to 1,400 tons of annual
greenhouse-gas reduction the cleaner fuel allowed. This arrangement, which
improved air quality in Seattle, wouldn't have occurred without the financial
incentive provided by Seattle City Light.
"Our approach initially was
very strict," says Corinne Grande, a strategic adviser to the utility. "The
project would only happen if the check came in the mail from us." But Seattle
sought to offset hundreds of thousands of tons of gas a year. "We wanted offsets
quickly, not offsets coming 10 or 20 years in the future," Grande
says.
City officials culled dozens of offers from various middlemen.
Several factors drew attention to a DuPont (DD )project reducing emissions at a
Louisville (Ky.) plant that manufactures the refrigerant Freon, Grande recalls.
DuPont enjoyed a strong reputation for reducing greenhouse gases, and the
Louisville plant provided the chance to buy in bulk. Seattle City Light
purchased its largest block of offsets in 2005 from DuPont, for nearly $600,000.
The 300,000 tons of co2 reductions were enough for Seattle to
claim "net zero" emissions for its utility, with plenty left over for 2006. The
price, at only $1.95 per ton, was tiny compared with that of the biodiesel
venture, which ran as high as $220.
NO
DETAILS DuPont deserved to be rewarded for its climate
efforts, says Grande, the adviser to Seattle City Light. The chemical company
"took a chance on doing more than they needed to do," she adds. "We'd like to
encourage the continued destruction of greenhouse gases."
But Seattle's
offset purchase didn't prompt the cleanup of the once-dirty Louisville plant.
DuPont had begun researching improvements all the way back in 1995 and installed
a more environmentally friendly system in 2000, five years before Seattle began
paying DuPont. "We would have continued with these emissions reductions anyway,"
says Stephanie Jacobson, a DuPont spokeswoman.
In a legal twist,
Washington's state Supreme Court ruled earlier this year that the Seattle
utility lacks authority to use ratepayer money to fight global warming. The
state legislature could counteract that decision, but meanwhile the future of
Seattle's offset program is uncertain.
The growing green marketplace
offers an alternative to carbon offsets known as renewable energy certificates,
or RECs. When RECs work properly, producers of wind-generated power and other
"renewable" energy sell the certificates as a way of promoting the creation of
additional renewable energy sources.
One RECs buyer is Vail Resorts,
which runs ski and vacation destinations in the West. Vail Resorts declares in
marketing material that it is now "100% powered by wind." But this claim isn't
literally correct. Vail Resorts contemplated building expensive mountaintop wind
turbines to power its ski lifts and other operations. But instead it decided
last year to enter a multiyear agreement to buy, for a fraction of the cost,
RECs representing 152,000 megawatt hours of wind-generated electricity each
year, equivalent to its annual use. "We're in the travel business," says Rob
Katz, chief executive of Vail Resorts. "We're not in the electricity-generation
business." He adds that even if his business obtains its power from a standard
utility, which in the Rocky Mountains means relying mostly on coal, "we're
helping to push forward development of new wind projects."
Which new wind
projects? Katz says he relies on a broker to select appropriate recipients. His
broker, Renewable Choice Energy of Boulder, Colo., declines to identify any of
the investments it makes on behalf of Vail Resorts or its scores of other
clients. Neither party will discuss the price of the RECs. What Renewable Choice
will say is that the RECs it buys and sells are confirmed by the Center for
Resource Solutions, the San Francisco nonprofit, as representing power not
counting toward any government mandate and coming from projects built since
1997. RECs related to more recently built projects are thought more likely to
spark development of new projects.
Still, this kind of secretiveness
provokes skepticism. "If neither a seller of RECs nor the buyer will provide any
details of how, exactly, their transaction is reducing carbon emissions, I would
suspect it's vaporware," says Randy Udall, director of the Community Office for
Resource Efficiency, an Aspen (Colo.) nonprofit that promotes renewable
energy.
Some developers go further, scoffing at the basic economics of
RECs, most of which sell for $1 to $3 per megawatt hour—a small fraction of what
wind projects can attract in federal tax incentives. Voluntary REC purchases
"are pure corporate marketing and image management" for buyers, says Mike
O'Sullivan, senior vice-president for development at Juno Beach (Fla.)-based fpl
Energy (FPL ), the nation's
largest developer of wind power. "The economics of our wind investments have to
work without the green credits."
More broadly, the proliferation of
suspect RECs and offsets may persuade consumers and businesses that preventing
climate change comes cheap, says Anja S. Kollmuss, outreach coordinator of the
Tufts Climate Initiative, an advocacy group affiliated with Tufts University.
"We cannot solve the climate crisis by buying offsets and claiming to be
climate-neutral," she adds. "Nature does not fall for accounting schemes."
