Reclaiming Carbon Offsets

by Molly Aeck

While channel surfing a few months ago, I came across a Law & Order episode, in which the murder victim had been running a carbon credit scam… seriously. It’s no wonder that when people ask me what I do, I never tell them that I work for a “carbon credit” company or an “offset provider”. I awkwardly explain around these words like a game of $100,000 Pyramid, but am much less likely to trigger someone’s word-recall of a media story that dismissed offsets as a conspiracy. When I buy myself time to talk about my experience hunting down emission reductions, prior to introducing the buzzwords, the listener is usually more receptive to the logic behind using a market to uncover least-cost abatement opportunities.

It seems to me that in the three+ years I’ve worked for EcoSecurities public impressions of carbon offsetting have wavered dramatically. In 2005, the Clean Development Mechanism was the newest shiny tool for channeling investment from industrial countries to assist developing countries in leapfrogging dirty development. In 2007, a different company was going “carbon neutral” every day. But shortly thereafter came websites like CheatNeutral and reports dismissing the CDM as failed before we even had a chance to learn by doing. Now, US policy makers are designing cap and trade legislation as though the last decade of emissions trading never happened.

I would no sooner get into an argument about the superiority of a carbon market to a carbon tax than I would a debate about scientific evidence of global warming. Someone else can make the arguments with data and graphs. However, when I’m not busy avoiding the subject entirely, I am at times compelled to defend the CDM and the value of offsets from a purely experiential stand point.

My adventures in carbon trading began when I received a Fulbright scholarship to spend a year in the Philippines researching project financing for renewable energy. At that time, a 33 MW wind plant in Ilocos Norte was the first and only project to have obtained CERs in the country, but I visited with dozens of companies pursuing CER revenue to finance technologies ranging from bagasse co-gen at sugar mills to large-scale geothermal. It was on one such site visit that I was introduced to EcoSecurities, which owned anaerobic digester projects at 16 different piggeries.

I joined EcoSecurities as their local project manager in the Philippines and sought out to secure “host-nation approval” for these projects. Getting things in order was no easy task. I won’t get into details, but it involved calibrating biogas meters, hosting stakeholder meetings in rural barangay halls, training local “pollution control officers”, and navigating the nebulous world of environmental permitting in a developing country. I didn’t need a verification report to tell me that the emissions reductions from these projects were real – I took part every day in creating their additionality. I also experienced the desired co-benefits firsthand; the water was dramatically cleaner, the air smelled better, clean local electricity replaced dirty diesel trucked in by dirty diesel.

Today there are over 4,000 projects in the CDM pipeline and the World Bank estimates that by the end of 2008 the CDM had leveraged over $140 billion in clean energy investment to the developing world. In light of this, why at times is the concept of “offsetting” still dismissed as a distraction from real infrastructure change or an undeserved license for someone else pollute? Certainly there will always be examples of bad projects that slipped through the cracks, but what’s important is that the CDM motivated us to do something. It motivated us to put on our rain boots and tramp through pig sh*t. So to all of you out there who’s time and effort became part of a project’s additionality- when you use buzzwords like “carbon credits” and “offsets” to describe what you do, back them up with darn good explanation of what that means on the ground, so that someday soon these words can be attributed the tangible connotation they deserve. Until then, I hope there’s not another Law & Order episode where the crime drama involves carbon trading – I don’t think I could take it.

Molly Aeck is a Senior Client Manager for EcoSecurities based in San Francisco. She encourages you to check out EcoSecurities’ ProjectNet which brings the Philippine piggery and other offset projects to life through photographs, diary blogs, video footage, testimonials, location maps and project design documents (PDDs).

Cap-and-Trade: How it works and why it’s the been the option of choice

In the run up to Copenhagen and the debate over Waxman-Markey, I think it’s worth laying out some of the key debating points on how cap and trade works and why it’s been our weapon of choice to date in the climate change fight.

I like to think of our carbon and energy problem as follows. We built the first industrial economies and long term economic growth model in all of human history in the last 200 years on a cheap, available energy base, in part by effectively running down our existing inventories of energy stocks from the least cost to the most expensive. We now need a lot more inventory each year (since we’ve been successful and are a lot bigger), and we’re into the expensive layer of our inventory, so it’s hitting our global cost of goods heavier than before. And we know we need to find more sources to replenish inventories, and we know that if we move immediately to higher cost sources we’ll pay the price in GDP.

We also know that producing and using those inventories had a non zero (and we argue about the level) cost to our environment that we have not measured well, but have been working on reducing for the last three decades. But we’ve now run into a new part of that cost with carbon or GHGs that’s very large, and is going to take a much larger and bigger hit to take care of, and depending on your view, has an aggressive time fuse on it. Essentially this means pricing carbon into our economy – which will basically add a whole new cost in all of our supply chains, a cost that varies from country to country and industry to industry, and will shake up comparative advantage in trade. And because it’s global, as far as the environment is concerned, for carbon, unlike most environmental pollutants, it doesn’t matter where in the world it’s emitted or reduced. So our problem is China’s problem is Europe’s problem is our problem.

So we start with a first climate change goal: to reduce the carbon emissions levels in the economy, by a level that we all debate by a point in time that we all debate. But we have to realize that while we do this, we do need to replace those energy supply inventories to both keep us where we are in GDP, and find new ones to sustain growth, or we’ll solve our GHG problem simply by being really poor. And we have to remember that adding costs has to be paid for, and it isn’t “business” that pays for it, it’s us, with business as our proxy.

So my corollary is the goal should be to squeeze carbon emissions out of the global economy in the fastest, least cost path, and as fairly as possible. Sorting out what that means and how to do so is the rub. But part of fair should mean a “do no harm” principal for the economy as well as the environment – meaning that when we start, as far as possible no country or group or industry or company within industries gets penalized out of the gate without either compensation or enough time to adjust. Think of it like eminent domain. If we give something up to the greater good, we deserve to get paid for it.

We have two main ways to go about it, place a tax or penalty on the emissions, or constrain the emissions factors (like power generation, driving, etc.) Cap and trade is essentially a hybrid of the two. The cost of such carbon reduction, because of the ubiquitous nature of carbon, and typically inelastic demand curves for most energy and carbon intensive products, is spread across all consumers in any scenario, but depending on system design can be borne disproportionately by some groups, industries or countries. Our special challenge is because of that global nature, we literally HAVE to have a solution that can engage and work in every country. Unlike cleaning up a local toxic spill, where we can fix ours without our trading partners, in carbon, if China fails, we fail. So if we try and succeed, and China does not try, the environment loses, and we lose worse.

Carbon Tax – Basically with carbon tax the government picks a series of carbon intensive industries or products, assigns a carbon value to them by one of a number of methods, and levies a tax on them. It’s often touted by economists as theoretically the cheapest method, and generally an industry favorite because they know how much they’ll have to pay and can plan.

But carbon taxes have big drawbacks. You can’t be sure you’ll actually get the level of reductions you want, because the tax fixes price, not volume. Worse, carbon is a global problem, and getting global tax codes to mesh together is virtually impossible (we can’t even do it inside the US), which means we may end up with everybody paying a different price of carbon and a complete mess. That certainly would throw the efficiency argument out the window. The next big disadvantage is that if you don’t get the tax level and structure exactly right, businesses and consumers get hurt in unpredictable ways, and have little room to adjust if we get it wrong. So while theoretically better, it’s not a very “fault tolerant” plan.

Main advantage is that you have a known cost to industry (which is why most industry prefers tax to trade or command and control). Next main advantage is that the the government gets lots and lots of revenue, which is why many politicians favor it.

The second option is classic environmental “command and control”, if you’ll excuse the perjorative sounding nature of that term. Esstentially the EPA or equivalent simply regulates every one who produces GHGs, and tells them how much they can produce through a permitting process.

The advantage is that you know exactly how much emissions reduction you are going to get. The disadvantage is that you may pay much more than you thought, and sink your economy, especially if your trading partners are more lax on either regulation or enforcement, and you let the EPA pick the winners and losers. The other disadvantage is that there is no upside. Under no circumstances will you ever get more reductions than you thought, unlike cap and trade, where done right, you may.

Cap and trade is the middle ground (which is why it keeps coming up). With cap and trade, the system operator (UN, EU, EPA, CARB etc) designates how many credits can enter the system, and prints, them like money. It then designates how many credits a company must turn in each year or period per unit of production (ie 0.5 tons/MWH of power produced), and penalizes or shuts down the company if they don’t turn in enough to meet their obligation. So no more emissions from a regulated sector will occur than credits (often called allowances) exist.

Then the regulator decides whether to sell the credits to the industry that needs them, or to simply allocate them (often based on some measure of current production). Both methods have pros and cons, and in practice have nothing to do with environmental protection or the price of carbon (the total level of credits and the relative level of credits to demand sets that) and more with subsidizing one industry vs another, or collecting revenue for the government.

Finally, the regulator can let offset credits be produced from the remaining unregulated sectors (or from inside a regulated or “capped” sector if appropriate adjustments are made), and sold to the emitters (it simply adjusts the cap so that the total level is where we want it to be). The advantage of this is that the regulations can be phased in easier, and we get a more equal price of carbon.

And what happens is that in unregulated sectors any time potential reductions exist (eg, a very inefficient emitter that could be shut down or run more efficiently), carbon developers pay up for the rights to the reduction, and that emitter finds it’s more profitable to do the right thing. The downside is that it looks like emitters are getting a profit off emissions. In reality, they are getting paid to reduce emissions for you and I, at just the right price.

Then emitters and financial parties buy and sell these credits from the government or each other or develop offset credits in a race to pay the least. And since the regulator starts reducing the number of credits it puts into the system, it’s kind of like musical chairs, the slowest, most carbon inefficient company gets left out and has to shut down, or shifts to a lower carbon production in order to stay in business.

The main advantages of cap and trade – 1) it assures us that we will meet our target goals like command and control 2) but it allows industry the flexibility to figure how to meet them cheapest (which is good for all of us), 3) it tells us what the real price (or cost) of carbon actually is, 4) and it’s better at equalizing the price of carbon so everyone pays the same across different industries and geographies, 5) in practice it costs less, and is easier to implement in a multicountry environment than command and control or tax.

Main disadvantages, it takes some time to get up and running, and makes it look like (not really true), that emitters are making money off it. Trust me, if they thought it was a profit center, they’d be all over it. The final disadvantage is it depends on the government operator to manage a market, something where we’ve had some good success (like NOX and SOX trading and up until recently the Fed), but can be susceptible to politics as usual.

In essence, you can think of cap and trade as a carbon tax with a tax rate that varies with the market (going up if industry is worse at producing carbon reductions than the government thought and down if they are better, and similiarly going down when the economy is bad and we can’t afford it and up when the economy is strong) and a tax base that is higher for emitters and emissions intensive industries than for those more efficient.

In any case, all three options need a lot of money spent on new technology and good measurement and verification. All three options will be expensive, and will be paid for by you and I at somepoint. And in practice, we are doing all three options to varying degrees right now.


Cleantech Blog "Power 10" Ranking Vol II 2009

Last year I did my first “Power 10” ranking for 2008 of cleantech companies, and the response was so good we’re doing it again.

I spend most of my day meeting and talking to companies in the cleantech sector. And those of you who know me know I have opinions on who is doing it right, and who is doing it wrong.

As before this is the Cleantech Blog Power 10 Ranking of cleantech companies doing it right.

Eligibility for inclusion in the ranking requires meeting a 6 point test. Suggestions for inclusions in future volumes are welcome. The 6 point test:
1. The company is energy or environmental technology related
2. I like their products
3. The market needs them
4. The company is smart about building their business
5. I’d like to own the company if I could (for the right price, of course!)
6. It is not already one of mine (my apologies to my friends Zenergy Power)

I have included cleantech companies big and small.

  1. Sharp – Makes the list again as top dog battling to hold its crown in solar PV. Keep on trucking.
  2. GE – Their M&A strategy delivered venture like returns, and they still hold power positions in wind, T&D, clean gensets, and water capital equipment. Hard to dethrone.
  3. Iberdrola – Barely didn’t make the cut last year. Largest wind operator in the world now. Deserves it.
  4. First Solar (NASDAQ:FSLR) – Still the low cost producer in PV and growing. Smart move swapping expensive stock for the Optisolar project pipeline. Keep those factories full!
  5. Goldman Sachs (NYSE:GS) -The only investor to merit consideration, but area a part of too many power plays in cleantech to leave off this time.
  6. DNV – Their auditors underpin roughly half of the carbon markets. In carbon, audit and verification is everything. Their market share slipped some, but they hold their crown as the only one of the big carbon auditors yet aggressively investing in the US.
  7. Applied Materials – The future of thin film if they can deliver on their strategic moves. But I need to see some of your customer’s production taking serious market share, or making next year’s list could be tough.
  8. Cleantech Group – The business is now definitely more than just a conference operator. Despite massive competition in conferences (long a cash cow for them), the Cleantech Group hasn’t lost its footing as the preeminent brand. And now seems to be learning how to play well with others. Great job guys on both creating an asset class AND building a cool company.
  9. Bayard Group/Landis Gyr – Smart grid is the big cleantech play along with carbon and solar. Bayard, now branded around Landis Gyr, is a global Metering/Smart Grid roll up powerhouse. Bought Cellnet, Hunt, Enermet, and Landis Gyr et al.
  10. Valero – Texas refiner’s acquisition of VeraSun and move into renewable fuels gets it the nod. Now where to from here?

Honorable mention to Zenergy Power plc (AIM: ZEN.L), one I helped cofound. I couldn’t resist this year since the team is making hay off of fault current limiter technology we bet on in 2004, and deserves the nod. Also to Smart Fuel Cell (XETRA:F3C.DE) – Still the most mature fuel cell company in the world by a mile. But revenues flattened in 2008 and it made no moves allowing it to stave off the newcomers to Power 10. 2009 is the make or break year. And finally to Sindicatum – Mover of the year in carbon in 2008. Raised a warchest into the teeth of a tough carbon market. Now we’ll see what they can do with it.

Also on our watchlist for next year: Abengoa, Acciona, SGS, Duke Energy, SoCal Edison, Origin Energy, Ecosecurities, Q-Cells, SunPower, Oerlikon, ConocoPhillips, BP, Shell.

Of note, no CIGS or solar thermal this year. The list is indicative of a shift towards carbon and projects. Still no cellulosic, and I can’t bring myself to add EVs to the Power 10 until somebody shows something real. Perhaps the 2013 list?

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is founding contributor of Cleantech Blog, Chairman of, and the Chairman of Carbonflow, Inc..

SGS Climate Change Head on the First Carbon Credits from the Voluntary Carbon Standard

I had the chance to catch up with Robert Dornau, an economist who is Vice President of SGS Climate Change Programme, one of the leading verifiers of carbon credits, just as SGS verified the first carbon credits under the Voluntary Carbon Standard.

Robert, I saw the press release on the first verified VCUs by SGS. Can you tell me a little bit about what VCS is and how it’s different?

I am happy to tell you that SGS also validated the first projects registered under the Voluntary Carbon Standard (VCS). The VCS provides a rigorous, trustworthy and innovative global standard and validation and verification program for voluntary emission reduction projects. It ensures that carbon credits generated from those projects can be trusted by business and consumers and have real environmental benefits. The VCS was initiated by the Climate Group, the World Business Council for Sustainable Development (WBCSD) and the International Emissions Trading Association (IETA). What sets the VCS apart from other voluntary standards is not only this prestigious group of founding fathers, but the fact that it has undergone two rounds of global stakeholder consultation and was developed under guidance of an international steering committee from the business, industry and non profit sector (including SGS).

The VCS provides innovative approaches to a credible and diligent approval of new methodologies especially for the forest sector. Another element that sets the VCS apart is the recently launched registry system.

We’ve heard the VCS discussed for some time now – are these really the first carbon credits from VCS? Why did it take so long? Are we going to see more of these?

The first version of the VCS was released on 28 March, 2006. Soon after, first projects were validated and verified against this standard. Until the recent launch of the registry system, the credits generated were only traded on the back of certificates issued by verification companies like SGS. Having a registry system that lives up to the high standards of financial registries was a number one goal of the VCS from the start. Unfortunately it took a bit longer than expected to develop this system. It now consists of three independent registries and the VCS database. I am absolutely certain this was the final launch pad for the VCS to establish itself as the standard of choice for any credible market participant.

What can you tell us about the differences between validation and verification of projects under VCS as compared to CDM and the Kyoto carbon project markets?

In principle there are not many different ways to conduct a proper validation or verification of a GHG project. The VCS relies on the principles for validation and verification of GHG projects established by the International Organization for Standardization (ISO). The new set of standards for the Carbon Market (ISO 14064 family) was develop taking into account best practice and experience from a number of global programs while being in itself program neutral.Two of the main differences are, that 1) the aim of the VCS is to assure that the emissions reduced by a project are measured, reported and verified correctly. If a buyer is interested in additional sustainability criteria, he/she can add those by applying a different add on standards like the Gold Standard for energy efficiency projects or Forest Stewardship Council (FSC) for forest projects. 2) Project developers can rely on methodologies approved in other accepted GHG Programs (like the CDM) to establish baselines, additionality and monitoring procedures. However, if the project developer wants to use a new approach towards additionality or a new methodology for baseline and monitoring of project emissions, this has to be approved by two verifiers (Double approval process). We expect this process to be a lot quicker than the current CDM process while delivering results of similar environmental integrity.

You’ve mentioned 3rd party verification. Is this similar to getting a CPA’s financial audit of a company? What role do you think 3rd party verification will play in the voluntary and US carbon markets going forward?

Market credibility requires that data used for emission trading is reliable, true and fair as well as credible. The third-party verification model has played an integral role in providing this credibility, and it has been accepted in major established markets. Third-party verification has been important in relation to both emission offsets, such as CDM and JI projects, and organization GHG emissions such as EU ETS, JVETS,.UK ETS, The Climate Registry, Western Climate Initiative. As emission allowances, related to the verified emissions, have the status of a financial commodity, it is a requirement that its verification and assurance meet financial market needs. In this regard, the third party verification model involves assessment of an organization’s internal control system including calibrations and QA/QC checks as well as actually data checks. It is also common in existing GHG programs for the verifier to assure the market risk of misstatements or omissions in any GHG emissions report and hence allowances or credits traded. We sincerely hope that a similar approach will finally be taken in the US for inventory and project emissions to assure that this market can be linked with other markets on the basis that “a ton is a ton” and the allowances traded have the same environmental and financial integrity.

I know that your main competitor in the global carbon markets, DNV, has also been growing it’s US presence.

Are we seeing a new wave of European carbon expertise moving into the US?
SGS is in the very fortunate position to be able use extensive global expertise in the development of our internal procedures. We of course always adapt those to local GHG program requirements. We bring in expertise from Europe in key technical quality management positions in the beginning of any new market. But the aim is and will be to run a local program with local capacity. I encourage everybody interested in the interesting job of a GHG auditor to apply with SGS an join our international team of experts.

You’ve told me that SGS has been hiring in the US for climate change, where is your office and what plans can you share?

SGS has offices in most US states and employs a staff of more than 3000 in the US working in all kinds of industry sectors. Our climate change program is headquartered in Ontario, California, but we are already in the process of training auditors across the country. SGS has been a first mover in all GHG programs globally and we understand that we have to develop expertise and manpower before the market is actually there. As such, SGS has been an active verifier under CCAR for years and is one of only six entities that achieved ANSI accreditation for ISO 14064 verification of TCR and CCAR. DNV by the way is not ANSI accredited.

And finally, you’re an economist by original training, so can you share a personal opinion on the causes of recent carbon price collapse and the recent article by Point Carbon suggesting that prices should rise by 2012?

The recent price collapse is a result of the international credit crunch and economic crisis. Decreasing industrial production resulted in lower emissions, which had an immediate effect on the demand for allowances in the EU. In addition companies were cash strapped and were selling EU allowances. 2012 is the final true up for phase II emissions in the EU ETS, until then companies will be able to borrow from next years allocation of allowances to meet last year compliance requirements, so that we should see the true demand and supply balance only towards the end of the period. Another result of the credit crisis is that less energy efficiency measures are being undertaken at industry and household level now, so that while the crisis caused relatively less emissions in the short run, it might cause relatively higher emissions in the medium and long run.

As EU companies can meet their compliance targets also with CDM credits, CDM supply also has an influence on the equation. The credits crisis results in less CDM project being started, meaning less supply of CDM credits. New GHG Markets in Australia, New Zealand and the US will compete for this reduced amount of credits. This will result in a decoupling of the CDM price from the EU ETS price, which has basically been the benchmark to date. So when you talk about the price of carbon, I don’t think that there will be a uniform price by 2012 yet.

So, depending on how deep and lasting the cuts in industrial production are, you will see an upward trend in prices towards the end of the Kyoto phase. So much for the different economic developments that will influence carbon prices, but as you know, the econometrician in me will simply say: the best forecast for tomorrow’s price is the price of today…

Thanks Robert, always good to catch up.

Neal Dikeman is Chairman and CEO of Carbonflow, providing software services to carbon developers and funds cut the cost of carbon abatement, including managing the validation and verification processes. Carbonflow is partnered with both SGS and DNV.

Carbon Offsetting Trends Survey 2008

EcoSecurities and ClimateBiz have just released their survey on carbon offsetting. For those who are members on our sister site CleanTech.Org, we are proud to have supported this project. Thank you to those of you who participated in this survey.

The Executive Summary is as follows:

The voluntary carbon markets continue to welcome new participants on both the supply and demand sides. Companies that previously committed to become carbon neutral appear to be continuing with their offset initiatives in 2008. In Europe, the emergence of the Gold Standard and Voluntary Carbon Standard (VCS) as the market leading standards is a notable development. The former is facing some minor supply issues which have in our view pushed up its issued price whilst the latter is working with several parties to establish central registries by year end for transfer of ownership and guaranteed retirement.

The primary markets on the development side are very active with new projects coming on line around the world to meet an increase in real demand for VERs and the expected increase in corporate’s looking to balance their unavoidable emissions. In the US, the rapid expansion in demand appears to favour US-located emission reductions, and this same force is shaping the types of offsets most in demand. Forestry remains a standalone sector, which has a real mix in sentiment from buyers. You either love it or you hate it. Whether the projects are reforestation or avoided deforestation, they appear to have mixed feedback in part owing to the lingering questions about effectiveness, immediacy and risk in investing in said projects. Conversely, the types of projects most favoured by this survey’s respondents are well-known projects which have an immediate impact, projects of the ‘charismatic carbon” variety: energy efficiency and wind power. Landfill and agricultural methane collection projects also scored highly in this study.

Reputation is pushing demand not only in types of offset projects in which companies most want to invest, but also in whom they purchase offsets from. When seeking out carbon brokers or retailers, experience and reputation were the top-rated factors, while project types, locations and price rounded out the top five requirements for offset projects.

Interestingly, despite the growth in project development the market has witnessed increases in primary market prices. On the other hand, global economic difficulties do seem to be pushing secondary market prices downwards, thus squeezing the difference between primary and secondary pricing. This perhaps reflects the reduced risk of developing projects as the markets grow and also an increased confidence among larger organizations in originating their own offset projects in the primary markets, a result that surprised us from our survey responses.

Climate Change Policy Thoughts, McCain, Palin, Obama, Et al

Those of you that know me know that fighting climate change is an issue near and dear to my heart – and day to day life, since I am currently involved with a start up working on helping to deliver even better transparency and environmental integrity to carbon credits.

So as a small government, energy focused, environmentally conscious, social liberal, fiscal conservative, who has worked in both oil & gas and alternative energy, I had a lot to like about the McCain-Palin ticket. And I’ve stated that and my reasons for it, and gotten ripped for it for an audience on this blog that is commendably and passionately progressive when it comes to these issues, but unfortunately doesn’t always read to the end of the blog articles or do their research before ripping me for being Republican. But one key area I struggled on was where Palin came down on climate change. Luckily for the 182 small government, energy focused, environmentally conscious, social liberal, fiscal conservatives like me left in America, John McCain’s climate change position has apparently rubbed off on her. Like her or not, this is a very good sign for progressives. It means we as a nation are joining the climate change fight no matter who wins the election fight.

To those of you who say we should have signed Kyoto, don’t forget, Obama, GW Bush, Hillary Clinton, and John McCain all agree on this one, multilateral climate change legislation has to include China and India committing to something. (Hillary actually flopped on this topic). And China and India haven’t agreed. The Senate voted something like 98 to 0 during the Clinton years saying no to Kyoto if China didn’t agree to caps.

The main difference between US politicians has been the willingness of every one on this list except Bush to work to push through some sort of cap and trade in the US – independent of a multilateral framework like Kyoto. McCain has been pretty lock step with the Democrats on this one. And then smaller differences emerge in their approach to tough the caps should be, and whether the profits from trading ought to go into the government coffers as a new (Iraq war size massive) tax, or back to industry to fund future abatements. Of those, Obama talks the toughest game, but McCain is the only one who has ever tried.

The problem with a unilateral approach to cap and trade is that it’s about like going into Iraq unilaterally – it’s a bad a idea. Carbon is a global problem, and lots of separate policies aren’t likely to solve it without significant economic collateral damage. And worse, with cap and trade or taxes, if we try to have separate markets or tax schemes, it means we likely get a different price of carbon in California than in Texas than in China, than in Europe. And if there is no way to equalize the price by trading credits in linked markets, the only route left for industry is to shift production out of the country with the highest price, or lose out to competitors from those markets with lower prices. If the markets aren’t linked (which Obama supports in small amounts and McCain in medium amounts), we will definitely see these geographical price differentials. Then industry will respond by shifting production to China and India, whether it’s overt or not, they won’t have a choice. The power of the consumer dollar will force it to some degree. And the tighter the US carbon legislation is compared to the Kyoto, the bigger incentive to shift production overseas. Hence Obama’s position on 80% auctions for very rapidly implemented, very tight caps results in a large tax windfall to the US government, and a correspondingly large effective price differential on the price of carbon from the US to Europe even, let alone the US to China which still has caps. Where as McCain-Lieberman’s slower and lighter (but still much faster and tighter than Kyoto) plan with explicit links to Kyoto markets, would result in more moderate price differentials. If the markets are linked (meaning you can buy Chinese credits to meet California demands), but the local carbon regulations are tighter, industry has less of a need to shift production ourseas, but can instead cans sometimes shift it’s carbon purchases overseas instead of labor or other materials, but instead we would still see an increased trade imbalance as dollars flow to China to pay for the carbon.

Basically, if the US cap and trade is tighter than foreign cap and trade, either manufacturing has to go off shore, or if the markets are linked and you can buy carbon offshore, then either dollars could go offshore for carbon to keep jobs and production home. That’s why the big push for multilateral climate change, carbon trading markets, and environmental regulation that moves in lockstep with our biggest trading partners.

Hey wait, does that mean that the Democratic position on climate change will actually exacerbate outsourcing to Asia and trade imbalances even MORE than the Republican position this time? ‘Fraid so. The thing I like about McCain on climate change, is that despite getting a bad rap on economics, he’s the only candidate who’s bothered to include the impact on you and I into the complex calculus of climate change legislation.

It’s a catch-22 with no real way out, and a lot of bad options. The worst option however, is doing nothing. Luckily, with Palin now toeing McCain’s line on climate change. That option may finally be off the table.

Cap-and-Trade Gold in the Golden State

By John Addison (7/2/08). Obama and McCain have both stated that climate change requires decisive action. Both support cap-and-trade, putting a limit (cap) on greenhouse gases and enabling the market to work by allowing the trading of permits.

How would this work in the United States? We will all learn from California’s progress with its enacted law – AB32 Climate Solutions Act. The implementation is detailed in the 93-page Climate Change Draft Scoping Plan.

By requiring in law a reduction in greenhouse gas emissions to 1990 levels by 2020, California has set the stage for its transition to a clean energy future.

Since the law was enacted in 2006, the lead implementing agency, the California Air Resources Board (ARB), has been getting an earful from everyone from concerned citizens to industry lobbyists. It moves forward publishing data from the California Climate Action Registry, facilitating 12 major action teams, conducting public workgroups, and drafting plans which get more feedback in public meetings. The ARB Board will next meet to review the proposed Scoping Plan on Novembers 20 and 21.

Climate change is already impacting everything in California from draughts that cause agricultural loses to water shortages that impact industry. But instead of seeing the glass as half empty, the California Plan states, “This challenge also presents a magnificent opportunity to transform California’s economy into one that runs on clean and sustainable technologies, so that all Californians are able to enjoy their rights to clean air, clean water, and a healthy and safe environment.” Cleantech will be a major winner.

The plan is ambitious because California’s population in 2020 is forecasted to be double the 1990 level. The Climate Solutions Act will require that per capita CO2e emissions be reduced from today’s 14 tons per year to 10 tons per day by 2020. The total state cap for 2020 is 427 MMTCO2e. Keys to success will include:

  • Green buildings with improved construction, insullation, energy efficient lighting, HVAC, equipment, and appliances.
  • Electric utilities that use at least 33 percent renewable energy.
  • Development of a California cap-and-trade program that links with other western states and Canadians provinces to create a regional market system.
  • Implementation of existing State laws and policies, including California’s clean vehicle standards, goods movement measures, and the Low Carbon Fuel Standard.

The Plan shows that California has learned from the Kyoto implementation. California’s scope is much broader, covering 85 percent of the State’s greenhouse gas emissions from six greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), hydrofluorocarbons (HFCs), and perfluorocarbons (PFCs). AB32 calls for incremental improvements all the way to 2050.

The transportation sector – largely the cars and trucks – is the largest contributor with 38 percent of the state’s total greenhouse gas emissions. Electricity generation is 23 percent. Industry 20 percent. Commercial and residential buildings are 9 percent.

Look for economic growth in a number of areas. New buildings will increasingly be LEED certified, often at the Silver level. Building efficiency retrofits will be an active area employing contracts large and small.

Distributed power generation will grow. Combined heat and power will be actively deployed. Process efficiency will continue.

Renewable energy will experience strong growth including wind, solar, geothermal, and bioenergy. Ocean power pilot projects will continue. Controversial new power from nuclear and petroleum coke gasification with CSS will be considered. In-state coal power generation is history in California. Using out-of-state coal power will continue to decline as GHG emissions are priced into the equation.

Wind continues to grow in California and the nation. A fascinating read is the Department of Energy (DOE) report, entitled 20 Percent Wind Energy by 2030, which identifies the real feasibility of the United States reaching meeting 20 percent of its energy requirements from wind by 2030. A path to over 300 GW of wind power by 2030 is detailed.

California and much of the nation is blessed with an abundance of sunlight. The Utility Solar Assessment (USA) Study, produced by Clean Edge and Co-op America, provides a comprehensive roadmap for utilities, solar companies, and regulators to reach 10% solar in the U.S. by 2025 with both PV and CSP.

C02 costs are not likely to significantly increase the cost of fuel, but rocketing oil costs have changed the game. Use of corporate flexible work programs, commuting, and use of public transportation are now at record levels in the state and will grow in popularity.

California High-Speed Rail (HSR) is likely to be on the California ballot this November, with a price tag that will be a fraction of the cost of expanding highways and adding an airport. HSR would link major transit systems throughout the state, and save billions in fuel costs and emissions.

AB32 is also likely to reach its goals because cars will increasingly outsell SUVs and trucks in California. By 2020, electric cars and plug-in hybrids may experience and explosion of popularity. New low-carbon fuels are likely to be widely used.

California is working closely with six other states and three Canadian provinces in the Western Climate Initiative (WCI) to design a regional greenhouse gas emission reduction program that includes a cap-and-trade approach. ARB will develop a cap-and-trade program for California that will link with the programs in the other partner states and provinces to create this western regional market. California’s participation in WCI creates an opportunity to provide substantially greater reductions in greenhouse gas emissions from throughout the region than could be achieved by California alone. AB32 may give the United States a head-start in its own cap-and-trade program.

John Addison publishes the Clean Fleet Report.

The Voluntary Carbon Market Does Not Reward Complexity

I had a lively discussion with Susan Wood, the CEO of SCC Americas, at the Carbon Finance North America Conference last week. SCC Americas is the US arm of Syndicatum Carbon Capital, one of the largest developers of Kyoto based CDM carbon credit projects in the world, and Susan herself has been doing emissions trading for over a decade, after starting out as an environmental engineer.

The punchline in our chat was quite fascinating – the US voluntary carbon market does not reward complexity in projects, Susan says. Basically, US carbon credit developers are only doing a few limited types of projects, like methane destruction. Why? Because the buyers, who dictate the voluntary markets, tend to be scared off by anything complex that they do not understand, or anything that does not appear to be future proofed against coming US regulations. This stands in stark contrast to the CDM market, where complexity is often the hallmark of the major developers since the methodology and standards process is trusted to a much greater degree by compliance buyers than the voluntary standards are.

One other way to look at this issue is that much of the innovation in new ways to abate carbon is coming from CDM under Kyoto, not the voluntary markets. A bit sad, and a challenge to the voluntary standards community to get its act in order. Possibly the rise of new standards like Voluntary Carbon Standard and Green-e Climate will help fix the crisis in complexity, but we have been saying that for a while. As Susan puts it, we need it to happen yesterday.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is founding contributor of Cleantech Blog, a Contributing Editor to Alt Energy Stocks, Chairman of, and a blogger for CNET’s Greentech blog. He is also the founder of Carbonflow, a provider of software solutions for the carbon markets.

Carbon Offsets Work – Will the Mainstream Media Ever Get It?

The carbon markets are an area of keen interest for me personally and professionally, so it is always frustrating that the mainstream media largely refuses to learn the details.

In general, layman and media who don’t understand the details of the carbon markets attack carbon offsets in two areas, first, questioning whether the credits are for a project that would have occurred anyway (a concept known in carbon as “additionality”), and second questioning whether there are checks and balances to ensure the environmental standards are adhered to and the abatement actually happens (in carbon known as the validation and verification processes). The frustrating part for anyone in the industry is that the entire of the carbon credit process set up under Kyoto is all about ensuring the answers to those two questions. Leading certification firms and carbon project developers have been dealing with the details behind those questions for years.

The biggest weakness of the carbon offset process to date has been that the high level of oversight and protection, while working, has led to higher costs and fewer projects getting done, rather than too many. Bottom line, the carbon markets ARE working, and are pouring billions of dollars into fighting global warming, just like the NOx and SOx trading markets helped reduce air pollution faster and cheaper than anyone expected. Now it’s time to figure out how to make them REALLY scale.

I caught up with a friend of mine, Marc Stuart, to give us a little teach in about the real story in carbon offsets, what matters, what does not, what works, and what still needs to be tweaked. Marc should know, he’s one of the founders of EcoSecurities plc (AIM:ECO.L), one of the first, and still the leader in generating and monetizing carbon credits. Marc, thanks for joining us, we appreciate the time and the teach in.

1. Even for those who don’t know much about carbon offsets, many people have heard about the concept of additionality, and almost everyone intuitively understands it at some level. But it is devilishly complicated in practice. I’ve always described it to people as “beyond business as usual”. Can you explain additionality and give us some insight into the details?

Additionality is the core concept of the project-based emissions market. In a nutshell, it means that a developer cannot receive credits for a project that represents “business as usual” (BAU) practices. A classic and often cited example is that industrial forest companies should not be able to get credits simply for replanting the trees that they harvest from their plantations each year, since that is already part of their business model. A utility changing out a 30 year old, fully depreciated turbine would not be able to claim the efficiency benefits, though a utility that swapped out something only five years old might be able to under certain circumstances.

Additionality is easy to definitively prove in cases where there is zero normal economic reason to make an investment, such as reducing HFC-23 from the refrigeration plants or N2O from fertilizer plants. Such projects easily pass a “financial additionality” test, since it’s clear that as a cost without a benefit, they wouldn’t have been economically feasible under a BAU scenario. It gets far more complex though, with assets that contribute to both normal economic outputs and the development of carbon credits, in particular in renewables and energy efficiency. Sometimes these projects are profitable without carbon finance, but there may be other barriers preventing their execution that make them additional.

The UN has developed a very structured and rigorous process that projects must undergo to prove additionality. It is essentially a regulatory process with multiple levels of oversight, in which a body called the Executive Board to the UN’s Clean Development Mechanism (The CDM is the international system for creating carbon offsets called CERs) ultimately makes a binary decision about whether a project is eligible to participate or not. Anchored in the middle of that oversight is an audit process run by independent, licensed auditors, the largest of which is actually a multi-national nonprofit called Det Norske Veritas (DNV). However, many projects don’t even make it to that decision point before they are dropped in the process.

2. One of the benefits of carbon offsets often touted by those who support them is the idea that they provide compliance flexibility and liquidity in the early years of a compliance cap and trade system. What are your thoughts on how that works?

The simple reality is that many assets that emit carbon have a long lifetimes and that legitimate investment decisions have been taken in the past that rightfully did not take into account the negative impact of carbon emissions. For an easy example, think about somebody who is a couple of years into a six-year auto loan on a gas guzzler—can policy just force that person to immediately switch to a hybrid, especially since the used car market for his guzzler has now completely disappeared? Even if society says yes, how long would it take for the auto industry to ramp up its production of hybrids? Now look at infrastructure—for example, most power plants and heavy industry facilities have lifetimes of thirty years plus. Even if we were economically and politically able to affect a radical changeover, simply put, the physical capacity for building out new technology is limited, even in a highly accelerated scenario. So, like it or not, GHG emissions from the industrial world are going to take quite a while to stabilize and reduce.

The point of offsets is that, in fairly carbon efficient places like California or Japan, availability of low cost reductions within a cap-and-trade system is quite limited, meaning there is an incentive to look beyond the cap for other, credible, quantifiable, emissions reductions. Reductions in GHGs that are uncapped (either by sector, activity, or geography), such as are found in the CDM, are thus a logical way to achieve real GHG reductions and accelerate dissemination of low carbon technologies. In effect, the past helps subsidize changeover to the future as buyers of emission rights subsidize other, cheaper, GHG mitigation activities. As caps get more restrictive over time, capital changeover occurs. Offsets allow this to occur in an orderly and cost-effective manner.

3. There have been a number of studies questioning whether offsets are just “hot air” and whether carbon offset projects actually achieve real emission reductions. What is your response to these accusations?

As noted in the first question, the CDM in particular is a market that is completely regulated by an international body of experts supported by extensive bureaucracy to ensure that real emission reductions and sustainable development are occurring. The first and foremost requirement of that body is to rule on whether each individual project is additional. Each project is reviewed by qualified Operational Entity, the Executive Board Registration and Issuance Team, the UNFCCC CDM Secretariat and the CDM Executive Board itself. Plus, there are multiple occasions for external observers to make specific comments, which are given significant weight. So, while there is always the chance something could get through, there are a lot of checks and balances in the system to prevent that.

That said, determining an individual emission baseline for a project – the metric against which emission reductions are measured – is a challenging process. The system adjusts to those challenges by trying to be as conservative as possible. In other words, I would argue that in most CDM projects, there are fewer emission reductions being credited than are actually occurring. It is impossible for a hypothetical baseline to be absolutely exact, but it is eminently possible to be conservative. Is it inconceivable that the opposite occasionally occurs and that more emission reductions are credited to a project than are real? We’ve never seen it in the more than 117 projects we’ve registered with the CDM, but I suppose it’s possible.

4. What about the voluntary carbon market in the US, where there have been accusations that many projects would have happened anyway? How is this voluntary market different from what EcoSecurities does under the Clean Development Mechanism?

The voluntary market has had more of a “wild west” reputation compared to the compliance market. In some ways, that is deserved, but in some ways it is unfair. For a number of years, the voluntary market was the only outlet for project developers in places like the United States and in sectors like avoided deforestation that were not recognized by the CDM. However, because there were virtually no barriers to entry and no functional regulation other than what providers would voluntarily undertake, it was difficult for consumers and companies to differentiate between legitimate providers and charlatans. For EcoSecurities, while the voluntary market has been a very small part of our overall efforts, we always qualified projects according to vetted additionality standards such as the CDM and the California Climate Action Registry, and always used independent accredited auditors. With the emergence of stand-alone systems like the Voluntary Carbon Standard (Editors note: Marc Stuart sits on the board of the VCS), and the growing demand for offsets from the corporate sector, I believe the “wild west” frontier is drawing to a close. [Editors note: Other voluntary carbon standards we watch closely include Green-e Climate, put out by the people who certify most of the renewable energy credits (RECs) in the US]

It is also important to note that while the voluntary market has recorded very explosive growth, it is still a very small fraction of the regulatory market, comprising a few tens of millions of dollars of transactions, versus the potential tens of billions of dollars of value embedded in the highly regulated and supervised CDM. The fact that many observers still equate the occasional problems in the fringes of the voluntary market (which are increasingly history) with the real benefits being created in the Kyoto compliance market is a misperception we’d like to correct.

5. What about these projects we’ve heard about in China, where the sale of carbon credits generated from HFC-23 capture is far more valuable than production of the refrigerant gas that leads to its creation in the first place? How is this being addressed in the CDM and how can future systems ensure that there are not perverse incentives created like this?

HFC-23 projects are the epitome of what is often referred to as “low hanging fruit.” In this case, most of the fruit might have actually been sitting on the ground. While there is no doubt in anybody’s mind that the market drove the mitigation of HFC-23 globally, the extreme disparity between the costs of reducing those gases and the market value those reductions commanded invariably led to questions whether there were more socially efficient ways to have reduced those emissions. In all likelihood, there were. But to catalyze an overall market like this, it is probably important to get some easy wins at the outset to create broader investment interest and this certainly accomplished that. Moreover, Kyoto created a mechanism for engaging these kinds of activities. It would have sent a much worse signal to the market to have changed the rules in the middle of the game. The CDM has subsequently adjusted the rules to make sure that no one can put new factories in place simply for the purposes of mitigating their emissions. I don’t see too many other situations like HFCs in the future, simply because there are no other gases where the disparity of mitigation costs and market value is so severe.

5. Given that the majority of CDM projects currently under development are located in China and India, how can we ensure that these countries eventually take on the binding targets we will need to reach the scientifically determined reductions in GHGs? Doesn’t the CDM simple create an incentive for these countries to avoid binding targets as long as possible?

It is clearly in the world’s interest to get as much of the global economy into a low carbon trajectory as quickly as possible. However, it is politically unrealistic to expect these countries—whose emissions per capita are between one fifth and one tenth the per capita of the United States—to make an equivalent commitment at this juncture, particularly considering that they are in the midst of an aggressive development trajectory. The CDM provides a way for ongoing engagement with these countries, developing the basic architecture of a lower carbon economy. And there is no doubt that China’s emissions in 2012, 2015 or 2020 will be measurably lower than they otherwise would have been, simply because of the current accomplishments of the CDM. Over time, the use of project based mechanisms will contribute to accelerating the development and dissemination of low carbon technologies, which will make those negotiations for binding caps from all major economies far more tenable.

6. It is widely believed that to address the climate crisis on the scale necessary to avert dangerous global warming, significant infrastructural and paradigm shifts must occur at an unprecedented scale. Some people are concerned that offsets provide a disincentive for making these shifts, since companies can just offset their emissions instead of making the changes themselves. Is this something you saw under the EU ETS at all, and if so, how can it be addressed in a US system?

Virtually all of the macroeconomic analysis that has been done of Phase I of the ETS shows that there were real emission reductions undertaken within the system, despite the fact that many companies were also actively seeking CDM CERs. Clearly the fact that both Kyoto and the EU ETS system place quantifiable limits on the use of CDM and Joint Implementation (JI) credits guarantees that emission reductions will also be made in-country as well, so pure “outsourcing” of emissions compliance is not possible. This also appears to be the model being pursued in most US legislation.

7. Many have complained that the CDM system is too administratively complex, unpredictable, and that the transaction costs of the system are so significant that they could almost negate any possible benefits. What lessons can be learned about structuring an offset system in a simpler, but still environmentally rigorous way? What steps is the CDM EB taking to address these issues?

The CDM treads a very fine line between ensuring environmental integrity of the offsets that it certifies and the need to have some kind of efficient process within an enormous global regulatory enterprise. To date, one has to think that they have gotten it about right, as business has complained about inefficiency and environmentalists have complained about environmental integrity. However, it is becoming increasingly clear that the project by project approval approach is creating logistical challenges as the system graduates from managing dozens, to hundreds, to now, quite literally, thousands of projects in all corners of the world. Ironically, it is the success of the CDM in terms of its very broad uptake by carbon entrepreneurs that is causing problems for the current model.

We believe the benefits of the CDM can be maintained by moving many project types into a more standardized approach, whereby emission reduction coefficients are determined “top-down” by a regulatory body, as opposed to being undertaken individually for every project by project proponents. For example, there are dozens of highly similar wind energy projects in China that all have microscopically different emission baselines. A conservative top down baseline set by the regulator (in this case, the CDM Executive Board) would enable projects to get qualified by the system in an efficient manner with far less bureaucratic overhang. This is how California’s Climate Action Reserve deals with project based reductions and we think that it could work well for many sectors.

8. Is there any difference between a renewable energy certificate (REC) and a carbon offset? Does EcoSecurities support the concept of selling RECs to offset carbon emissions?

While renewable energy clearly helps lower the carbon intensity of the electrical grid, there are a great number of other incentives for development of renewables in the US, including significant Production Tax Credits, and in most states, RECs or Green Tags. For EcoSecurities, this makes it extremely problematic to claim that these assets are additional, despite their obvious benefits to the global environment and decarbonization of the economy. Acknowledging this, EcoSecurities—along with many other companies—has steered clear of developing REC projects for VERs in the voluntary market. There are other firms that have chosen other approaches, which again highlights the need for standardized approaches like the VCS. That said, we are very active in helping create carbon value for RE projects throughout the developing world via the CDM, where incentives such as RECs are almost universally non-existent.

9. There has been a lot of concern about “carbon market millionaires” profiting from selling offsets, and that the only “greening” going on is in the lining of peoples’ pockets. As a carbon market millionaire yourself, what do you think about this concern?

Capital markets exist to reward innovation and punish underperformance. EcoSecurities has existed for more than 11 years and the founders – of which I am one – have devoted more than 15 years to building up various aspects of the carbon market. For many of those years, as we watched friends and colleagues flourish in other markets like internet and biotech, our decision to stay in this seemed fairly quixotic. But we understood enough of the science of climate change to recognize that a fundamental policy response had to be forthcoming, or we would be heading to a global catastrophe. Now those policies have come into focus and the overriding recognition is that society will need to mobilize trillions of dollars of capital to decarbonize the global economy. As part of the proverbial “bleeding edge” for many years, we were ironically well positioned to take advantage when early movers in the capital markets recognized the capabilities and brand that we had built up over a decade. As for whether that is the only greening – well, I can tell you that given the very conservative and difficult aspects of qualifying projects for the CDM, I am 100% certain that our activities contribute solidly to that decarbonization trajectory and that real emission reductions have occurred all over the world because of our efforts.

10) What lessons have you learned personally about the market as a cofounder of the leading CDM project developer in the world? You must have some interesting lessons learned for the US as you are probably unique amongst your competitors in having been based here in the US for over 10 years.

Thanks for the compliment but actually, I’m not that unique. I started in the market in the early 1990’s when the US was the epicenter of a future carbon trading regime, and Europe and Japan looked at it with suspicion and distaste. Quite a number of us from that era did not give up, but instead spent a fair bit of time since then getting our US passports stamped regularly to search the world for projects. It’s nice to see that we may finally be getting back to where we thought we would be a decade ago—with the US as a driving force for innovation in decarbonizing the world’s economy (coincidentally in a recent report produced by the UNFCCC, the US along with Germany, the UK and France provided over 70% of the clean technology currently being utilized in CDM projects). The US is in a perfect position to learn from the both the successes and mistakes within the first Kyoto iteration and I am looking forward to being part of that next stage as well.

11) What do you say to popular press who don’t seem to believe that Kyoto works?

Honestly, you haven’t seen what I have seen. I’ve traveled all over the world and seen the results of Kyoto, where “carbon entrepreneurs” – ranging from divisions within multinationals to garage inventors on their own—are seeking ways to cost effectively reduce GHG emissions. That simply would not have happened without the market signal that Kyoto created. The fact that the CDM has registered more than 1000 projects and has a backlog of several times that – despite the incredible bureaucratic requirements – shows an uptake several magnitudes beyond what anybody predicted when Kyoto was negotiated. When the managing director of a West African oil refinery is proudly detailing to you the steps he’ll be ordering his engineers to take to help save some 250,000 tonnes of CO2 emissions to the atmosphere, that’s when you realize that you’ve tapped into something significant. And having had the same basic conversation in Mumbai, Jakarta, Sao Paulo and Beijing, you realize that people really want to do something, but that you need a little push from a market. That said, we are still in the first tentative moments of what is probably a century long issue and there are doubtless many improvements that can and will be made. But we have undoubtedly proven that the basic premise works.

Thanks Marc. A pleasure to chat as always. Keep up the good fight.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is founding contributor of Cleantech Blog, a Contributing Editor to Alt Energy Stocks, Chairman of, and a blogger for CNET’s Greentech blog. He is also the founder of Carbonflow, a provider of software solutions for the carbon markets.