Have
Voluntary Offset Projects Come of Age?
Source Steve
Zwick, Ecosystem Marketplace
URL: http://www.greenbiz.com/news/reviews_third.cfm?NewsID=35411
There seems to be ever growing market demand for carbon-neutral
services in the United States. But questions linger that, with voluntary
carbon offsets under attack, America's fledgling market can deliver the
kinds of high-quality offsets that sophisticated global players
demand.
A couple years back, Mike Burnett found himself in an
enviable position: "We had money to spend on offsets," he says, explaining
that the funds came from regional energy companies interested in promoting
new technologies. And as Executive Director of the Oregon-based non-profit
environmental organization The Climate Trust, he had one pet technology he
was eager to support: something called "truck stop electrification."
It's pretty much what it sounds like: electricity pods at truck
stops that reduce carbon emissions by giving slumbering truckers an
overnight energy source that's more environmentally friendly than idling
their engines. The reduction in emissions is the difference between the
amount of carbon dioxide generated by an idling diesel truck and the
amount generated by the grid to provide power to the electricity pod.
"When we announced this project, the response was overwhelmingly
positive," says Burnett. "These are very high quality offsets, and we
wanted to increase the supply of quality offsets in the voluntary carbon
market." So he decided to set aside some of the reductions and offer
Verified Emission Reduction (VER) certificates for sale.
A VER
project is the voluntary world's equivalent of Certified Emission
Reduction certificates (CERs) offered under the Kyoto Protocol's Clean
Development Mechanism. Like CERs, a VER makes it possible for a company to
reduce its greenhouse gas footprint by funding a carbon-offset project
that reduces emissions. Unlike the Kyoto Market, however, the voluntary
market is still struggling to come up with generally agreed upon standards
and practices. What's more, the American market, with its burgeoning
myriad state and regional mandatory cap-and-trade regimes, is especially
fragmented.
Burnett found that Frankfurt-based 3C shared the same
philosophy about the need for quality offsets in the voluntary market. A
spin-off of Dresdner Bank and a major player in the carbon offset market,
3C has been buying up VERs that follow a methodology as close to that of
CERs as possible, but for one reason or another fall outside the Kyoto
process.
"As in the case of the Truck Stop Electrification
project, we also invest in countries that aren't signatories to the Kyoto
Protocol," says Bjoern Fischer, who runs 3C's new U.S. operation.
"Similarly, we find projects that are in, say, China -- a major source of
CERs -- but may lack host country approval or are just too small to be
effective Kyoto offsets to be counted as CERs but can provide verifiable
emission reductions nonetheless."
3C purchased the VERs from
Climate Trust in May of last year. The money helped The Climate Trust fund
the installation of pods in truck stops across the Pacific Northwest.
Making History
"This was the first time ever that a
European buyer had purchased VERs in the United States," says 3C
co-founder Sascha Lafeld, who negotiated the deal and expects the U.S.
voluntary market to overtake Europe in the next few years. "It's always
like this," he says. "The U.S. guys look for a while, and then when they
start to act, they are much more professional, much faster, and more
aggressive."
Lafeld cites a litany of reasons for buying American
-- most of which essentially boil down to increased demand within the U.S.
for voluntary offsets, and a tendency to want to see projects closer to
home.
Ken Newcombe agrees. He runs the acquisition efforts of
London-based Climate Change Capital, and says that European companies have
traditionally perceived social benefits in so-called "north-south"
projects, which use carbon offsets to promote sustainable development in
the southern hemisphere. "American companies don't have that same
missionary zeal," he says.
But they do have plenty of reasons for
investing at home, says Lafeld. "People want something they can see," he
says. "We are starting to get the same thing in Germany. Although
North-South investment has been popular, we sometimes hear, 'Why should I
give my money to an Indonesian wind farm? I'd rather invest my money
here.'"
Burnett says larger U.S. corporations in industries
expecting climate regulation also have an incentive for buying voluntary
projects in the United States. "These companies are in it to try and
develop the U.S. offset market itself," he says, "not just to gather up
some supply now. They want to demonstrate that offsets are viable, help
the market evolve, and ultimately to make sure that offsets have a role in
climate policy -- both at the state level now, and at the federal level
down the road."
For corporations in other industries, the story
behind the offset is often more important than the offset itself. "We call
these 'gourmet' offsets," says Burnett. "Companies that aren't just
looking for the cheapest ton, but also for social and environmental
co-benefits that look good in an annual report, are very important drivers
in the voluntary market."
But finding high-quality projects in
developed countries isn't always easy. Inefficiencies may exist, but they
are often identified on a case-by case basis, while developing countries
offer the chance to build massive green projects. 3C, for example, has
only two German projects in its portfolio, and one in the United States.
"The biggest problem in both places is finding projects that meet our
additionality criteria," says Lafeld.
Measuring
Additionality
Conceptually, financial "additionality" is a
no-brainer: you have to prove that money from the VER made the project
happen. "In the case of the truck stop electrification project, it was
clear that without the carbon credit incentive, it would not have been
economically feasible," says Lafeld.
But it's not always so
cut-and-dried, especially with high oil prices, Renewable Energy
Certificates (RECs), and government subsidies combining to make some wind
parks and other green projects economically viable with or without carbon
offsets. Many of the voluntary retail "offsets" being sold in the United
States, for example, are generated by reduction allowances trading on the
Chicago Climate Exchange (CCX), and that, say some, means apples are being
used to offset oranges.
"CCX has done an excellent job of building
an exchange for voluntary allowances, and within the environment in which
they have been operating, I'd say they've done the best job possible and
deserve credit for starting the market," says Lafeld. "But we're finding a
lot of the companies in the U.S. are essentially taking allowances from a
system like that and selling them as offsets, while others are offering
offset allowances that have been verified by universities. However, it is
essential to standardize verification and additionality criteria in order
to enhance the credibility of VERs."
A Buyer's Market
Earlier this year, 3C launched its first carbon fund --
essentially a $100 million war chest for buying emission reduction credits
around the world. Now, they're scouring the planet for projects that can
be purchased cheaply, but also have the highest chance of delivering
rock-solid CERs and VERs. For U.S.-based projects to find their way into
3C's portfolio, they will have to demonstrate the most tons per euro
invested -- something that could give U.S. projects an edge if the dollar
remains low.
Indeed, Burnett says the U.S. market has been lower
in cost than many buyers realize. "It's not necessarily true that the
lower cost stuff is overseas or in forestry," says Burnett. "In fact, I'd
say it has been a buyer's market here -- maybe because we have been one of
the few big buyers, but also because there's a lot of inefficiency to
squeeze out of this economy."
And he's far from the only one who
feels that way. Annika Colston, vice president in charge of Emission
Reduction Projects for U.S. carbon portfolio manager BlueSource, says
players active in the European and Kyoto markets have been flooding into
the U.S. market over the last four to six months either simply to learn
more about the market or to start doing business.
Salt Lake
City-based BlueSource maintains the largest portfolio of voluntary offsets
in the United States -- representing more than 300 million tons of
emission reductions from projects in 45 states across six project types.
To date, they have sold more than 14 million tons of offsets and say they
have firm forward demand. Colston estimates that between 30 and 50 million
tons of voluntary offsets were generated in the United States last year,
and sees plenty more in 2007. "It used to be you had Mark Trexler and a
handful of people trying to do business," she says. "But now you're seeing
all sorts of European companies advertising for jobs in the U.S.."
Trexler has been promoting offset projects in the U.S. since the
late 1980s, and recently sold his consulting company to Dublin-based
EcoSecurities, which hopes to harvest his U.S. network.
Lisa
Ashford, EcoSecurities's principle commercialization manager, says her
company is also beefing up its New York office to "focus on the emerging
U.S. market in terms of sourcing, developing, and potentially investing in
projects there."
Both she and Colston, however, say the U.S.
market has a long way to go before it gets up to world standards. "Some of
the rules in schemes like the Regional Greenhouse Gas Initiative (RGGI)
don't have strict additionality clauses," says Ashford. "They just state
that a project has to have started after a certain date to be additional,
but people who understand the issues know there's more to it than that."
"I do agree that some of the additionality on projects in the U.S.
is questionable when applied against the Kyoto requirements," says
Colston. "There is demand in the U.S. to begin addressing climate change
today so the voluntary market will kick in before the compliance market.
The only early compliance market is RGGI, and there's not a lot of
incentive to develop a portfolio of projects for their scheme. There's
nothing in California that sets guidelines on where it's going to go, and
as for whatever shape the future federal scheme takes, there are just too
many possibilities."
But there's also a growing understanding of
the dynamics behind incentivising carbon reduction. "We have been
approached by a number of buyers in the U.S. who are concerned with
additionality," she says. "They understand how important it is for their
credibility and to provide feedback to shareholders and management that
their funding is truly supporting emissions reductions rather than just
giving a donation. They're also increasingly aware of media backlash."
Sourcing Projects
But where to shop? Many North
American wind parks are out, because they don't need offsets to be viable.
Waste management projects are most likely going to face stiff regulation.
"Oil and gas and coal should be some of the most interesting
areas," says Colston. "I don't think we're going to move away from oil and
coal in the U.S., so I should be looking for projects that work within
this sector to bring clean coal and carbon capture technologies online
faster, and I think the carbon market can have a role there."
She
also sees growth in uncapped industries, and of course transportation.
"But transportation is complex, and not what you'd call the lowest-lying
fruit," she says. "Still, it's such a large source of emissions -- whether
it happens through the carbon market or legislation -- we must address the
sector."
She also sees growth in agriculture and forestry
sequestration -- something everyone seems to agree on.
"The
voluntary framework will rescue forest, vegetation and land-use based
assets and restore their rightful place in trade," says Newcombe. "The
rightful place I'm referring to is that the world needs to take carbon out
of the atmosphere and not just prevent carbon from going into the
atmosphere."
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