Have Voluntary Offset Projects Come of Age?

Have Voluntary Offset Projects Come of Age?

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."