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Cost of carbon avoided

Arizona's main power supplier, Arizona Public Service, unveiled plans to build the world's largest solar plant outside Phoenix.

The plant will provide electricity to 70,000 homes using solar heat, as opposed to panels, and help the utility to meet required goals for renewable sources of supply.

APS will pay $4 billion over 30 years for the supply, or $133 million annually for 280 megawatts.
Alexis Madrigal makes some extrapolations about the price and finds this a striking deal for solar power, priced below the generally assumed minimal cost of using the sun for electricity.

Madrigal puts the price at about 15 cents per kilowatt, or about 50 percent higher than the average U.S. rate, although Arizona rates are lower.

A different way to look at this is the cost of carbon dioxide emissions avoided. This calculator from the National Renewable Energy Laboratory suggests about 400,000 tons of carbon will be avoided. Figuring that the annual payment of $133 million is a 50 percent increase over alternative carbon-intensive power, that works out to a little over $100 per ton of carbon avoided.

Carbon taxes and cap-and-trade plans being kicked around in Washington put the cost of carbon anywhere from $12 to as much as $40, so in those terms this type of plant still isn't competitive. However, its close to a carbon capture project in the U.S. Midwest aims to sequester 1 million tons for about $86 each and its well below a UK parliamentary estimate that the social cost of carbon is about 70 pounds per tonne, or something around $125/ton.

Will Enron kill climate change legislation?

Is it possible that Enron and the late Ken Lay (that's him in cuffs) will come from beyond the grave to doom a relatively tough climate change law?

The environmental lobby cried foul this week over attempts by Senate staffers who want to add a friendly sounding "safety valve" to the climate change law that is most likely to be brought up for a vote. Some are saying they'd rather have no bill at all.

Promoters of agricultural carbon offsets also screamed, fearing their investments will be dead on arrival.

The Lieberman-Warner bill establishes a cap-and-trade system to control greenhouse gas emissions, and is considered the most aggressive bill in the current Congress. But a recent report from the Congressional Budget Office made a case for the safety valve which sparked the green lobby outcry.

The bill aims to cut carbon-related emissions by more 70 percent by 2050 by requiring polluters to purchase allowances to pollute, which are capped in number. Over time, the number of allowances will drop, forcing businesses to cut carbon emissions or buy permits to pollute from a business that has some to spare. Obviously, the price of those permits could soar if it becomes more difficult to meet reduction targets.

Enter the CBO report's safety valve.

This feature would set a price cap on permits. Environmentalists hate it because it removes an incentive to cut carbon pollution. Business claims it will promote long-term investment by creating certainty in future prices.

But what exactly did the CBO report say?

It looked at current cap-and-trade markets, and praises the one launched in the 1990s in the United States that cut sulfur dioxide emissions:

The Acid Rain Program is run by the Environmental Protection Agency (EPA) and is widely viewed as being very successful, bringing about large reductions in SO2 emissions for lower-than-expected costs.

So far, so good.

Later in the report it cites the need for a safety valve to avoid a repeat of the volatility in the sulfur dioxide market -- that's the successful market it praised earlier in the report. It even included a graph from an academic paper (free registration required) on the subject by William D. Nordhaus.

But it did so selectively..

Nordhaus's graph included more information than the reprint in the CBO report, and Nordhaus's showed that sulphur dioxide permits were less volatile than crude oil futures..

Nordhaus doesn't say it, but one can imagine a scenario in which pollution permits trade inversely to fossil fuel prices (as it happening in Europe). So while they may be volatile, overall energy costs including the allowances will be far less so, undermining some of the argument for the safety valve.

The CBO report cites another piece of selective evidence in support of a safety valve: the volatility of California's nitrous oxide market in 2000 and 2001.

And here's the Ken Lay connection.

As California experienced rolling power blackouts, moth-balled power plants that lacked nitrous oxide controls were brought back online, and their owners scrambled for nitrous emission permits for those plants and paid up to 10-fold increases for allowances.

What the CBO fails to make clear is the context for that market volatility.

We now know that Enron was gaming California's power market to drive power prices sky high and in turn prices for emissions permits.

Without mentioning this, is CBO providing support for a safety valve by pretending the havoc brought about by the work of Ken Lay and his Enron cronies is a normally functioning market.

Not really, but their selective use of data is a little odd.

A little pin money

To create and be credited for a voluntary carbon offsets, the developer must show that the offset meets the required "additionality," meaning the emissions reduction must not be required by law. It should also face hurdles in terms of financing, technology and institutional barriers such as cultural hurdles that can only be overcome with the funding that comes from selling a carbon credit.

There is also a final barrier. The practice that results in reduced emissions, creating the offset, shall not be common practice.

That what makes the news stories streaming out of the U.S. Midwest so curious. Farmers are selling offsets for practicing no-till agriculture, which leaves roots and therefore sequestered carbon in the soil. In Iowa, a state agency helps roll up the various farmers' credits into manageable contracts for offsets that are sold on the Chicago Climate Exchange. The Quad City Times described it this way:

For 30 years, Steve Berger has been a no-till farmer of corn and soybeans on his 2,200 acres in Wellman, Iowa, as a way to protect his soil from erosion and keep organic matter in the ground to aid the growth of his crops. Berger also qualifies to sell carbon credits — credits that businesses and others buy to offset their own self-imposed emission caps from those who trap or keep carbon in the ground. That is secondary to the benefits the no-till method offers to his land, he said.

“Last year, I made almost $3,000 from selling them, a little extra spending money for when my wife goes to Chicago,” Berger said. “But I’m not really sold on the whole thing. This is something I would do anyway, and some company is using me so it doesn’t have to clean up its own act.”

It's hardly surprising Berger isn't convinced. Does this really qualify as an exceptional practice?

Iowa expects to have 1.5 million acres generating about offsets for about 1 million tons of carbon emissions.

Walking the plank

Planktos has suspended operations. This was the company that was going to reverse global warming by dumping iron in the ocean, creating enormous blooms of carbon-devouring plankton. The management intended to fund operations by selling millions of dollars of carbon offsets from the greenhouse gas that was sequestered under the sea, until some scientists and environmentalists urged more research.

As The Carbon Monitor noted, the company is one among many (it's hard to see what's preventing anyone with a boat and some iron from entering the business), but Planktos was most dependent on carbon offsets for funding. When opponents spoke out and targeted the use of carbon offset as funding, it stood little chance.

Planktos received pretty favorable press coverage for its efforts. The company's demise probably doesn't say much about the science of using iron to encourage plankton which gobble up carbon. Rather, it probably tells us something about carbon offsets, and that this market may have peaked. A look at Planktos history, from its financial filings, shows they have a knack for identifying trendy businesses.

Diatom Corporation (“the Company”) was incorporated as eWorld Travel Corp on December 10, 1998 under the laws of the state of Nevada. On September 23, 2002, the Company changed its name to GYK Ventures, Inc. and on July 8, 2005, the Company changed its name again to Diatom Corporation. The Company originally was organized to provide internet-based travel services. On March 8, 2007, the Company effected a 1:1.5 forward split of its common stock and amended its articles of incorporation to reflect a name change from “Diatom Corporation” to “Planktos Corp.”

Internet-based travel services sort of says it all.

What are we waiting for?

It is our task in our time and in our generation to hand down undiminished to those who come after us, as was handed down to us by those who went before, the natural wealth and beauty which is ours.

John F. Kennedy (1917-1963) Thirty-fifth President of the USA.

The USA has long led the industrialized world and been the bastion of democracy during bitter struggles with totalitarian ideologies. Yet as the world's biggest consumer of energy very little is spent on finding alternatives to the burning of fossil fuels that are the biggest contributor to gren houses gases. Maybe it's because there is not enough pain to the average consumer yet. Or maybe the torch has yet to pass to a new generation of Americans.

How many trees does it take to green a championship?

How many trees does it take to green a football championship? It depends. If you're organizing a the largest sporting event for a country, but that country is rather thinly populated, you might decide 25,000.

What if you're organizing an extravaganza for a large country heavily populated with energy intensive fans? How many? About 100,000? Your event will attract 300 times as many veiwers as the other country's. Maybe you should plant more than 7 million trees. Well, the NFL settled on 9,000.

Why does the Canadian Football League need so many trees to offset an estimated 300 tonnes of carbon generated during the Grey Cup, and the Super Bowl need so few trees for its 350 tonnes of emissions? (Better yet: why is the Grey Cup generating almost as many emissions as the Super Bowl?)

Are the NFL's trees, which it is planting in Arizona (see map), more efficient? To be honest, the NFL's ponderosa pines are probably less up to the task of capturing carbon than the CFL's spruces. So shouldn't the NFL need more trees, not fewer?

The truth is, generating carbon offsets from forestry projects is pretty complicated stuff. Take the following equation, for example. It comes from the Guidelines for National Greenhouse Gas Inventories from the United Nation's Intergovernmental Panel on Climate Change. It's really quite a simple formula for determing the amount of carbon captured by a tree (apologies if this isn't aligned. I actually can't tell):

IPCC For the hypothetical country,
GW = 4.0 tonnes d.m.
ha-1 yr-1 (Table 4.12); and
R = 0.40 tonne d.m. (tonne d.m.)-1 for
above-ground biomass <50 gtotal =" 4.0" cf =" 0.47">● 5.6 tonnes d.m. ha-1 yr-1 ● 0.47 tonne C (tonne d.m.)-1
= 2,632 tonnes C
yr-1

Complicating things, the NFL plans for most of its trees to die -- they're being planted in an area that was burned recently, after all.

The CFL isn't actually planting 25,000 trees. It's buying offsets from zerofootprint.net, which bought them from a reforestation project in Maple Ridge, British Columbia. Judging from the

voluntary carbon standards

, which recommends long lag times to determine if trees actually grow to maturity, neither of these plantations should be generating offsets for some time.

No one doubts forests can store carbon in vast quanities. Only a crank would suggest otherwise.

In recent decades, the researchers say the area burned each year by wildfire has doubled, annual harvest rates have increased somewhat, and rates of carbon uptake by aging (Canadian) forests have slowed. In extreme fire years, such as 1995, 1998, 2002, 2003, and 2004, the carbon dioxide released as the forests burned accounted for up to 45% of Canada's total greenhouse gas emissions, dwarfing emissions from big industrial sources. In other years the forest still absorbs more carbon than it releases.

Who were these tree-hating researchers?

The Canadian Forest Service. Sigh.

Economic collapse and corporate foresight

Russia has cleared the way to begin selling carbon credits, exposing a slightly troubling issue for the carbon allowance market: the issue of overhang.

Anyone who invested in a newly listed tech stock during the dot-com bubble probably remembers overhang, or the excess shares that were not traded in the market. As the tech bubble deflated, much of the overhang that was held by company founders and venture capitalists came flooding into the market, adding to the downward spiral.

Russia is currently well below its emissions limits under Kyoto, thanks to its economic collapse in the 1990s which forced the closure of uneconomic pollution-belching factories. Thus, it has carbon credits galore. One investment bank has estimated this 'overhang' could total $10 billion. The Russian company Gazprom, which is the world's largest natural gas supplier, has hit on the ingenious idea of selling carbon credits bundled with its energy, thus providing carbon-neutral gas. The company has said it has no intention of flooding Europe with cheap carbon allowances, but it might change its tune if emissions permits became so expensive that its customers switched to wind power.

So what does this have to do with the United States? Du Pont, Entergy and other companies in carbon-intensive industries have accumulated carbon offsets and credits for reducing greenhouse gas emissions through foresight (rather than economic crisis). Du Pont, for example, committed itself more than a decade ago to cutting its emissions 65 percent below the 1990 level by 2010. They've probably been quite careful to have to reductions certified and verified, giving them a potential windfall if legislation recognizes these cuts.

Could this 'overhang' reduce the effectiveness of a cap-and-trade system aimed at cutting greenhouse gases? In theory, it shouldn't. But it might distort pricing of carbon allowances, easing the pain of reducing greenhouse gas emissions -- and that pain is precisely what is needed to change behavior.

Bipartisan pressure on Washington

A Republican governor and Democrat governor are teaming up to press Congress to pass the Lieberman/Warner bill, which legislates cuts in greenhouse gas emissions. Environmental Defense enlisted Tim Pawlenty, the Republican governor from Minnesota (the state's two senators both signed on a sponsors of the bill), and Arizona's Democrat governor, Janet Napolitano, for a series of radio ads. It's hard to guess what sort of impact this might have, but it shows the stakes and fractured alliances.

Both Arizona and Minnesota have been in the lead with climate change legislation, and both realize regional solutions are merely placeholders -- just temporary measures while everyone waits for Washington to get involved.

Apparently, the ads focus on the cost to the U.S. economy of not acting now on climate change. They push the point that the United States will lag further behind Europe if Washington can't come up with some sort of law this year to cut emissions.

Meanwhile, President George W. Bush convenes his climate talks with the world's big polluters in Hawaii on Wednesday. He'll try to push the idea of using technology to beat carbon, pushing to open markets for U.S. science to cut emissions in India and China. The longer he waits, the more he risks that those "technology transfers" he craves will clear the way not for U.S. gadgetry, but European expertise.

Chaos isn't good for business

It seems loony greens and their tree-hugging friends aren't keeping executives up at night. Rather, the bogeymen spooking business leaders turns out to be the politicians who promote supposedly 'business-friendly' voluntary approaches to cutting greenhouse gases.

Why? Top execs want clarity on climate change policy and prefer a U.N.-brokered system to the voluntary approach championed by the White House and some leaders in the Republican Party, according to a study. Investors always prefer a nasty known to unknown that offers a glimmer of hope. An established system, even one involving a carbon tax or deep cuts to emissions would clear the way for businesses to adjust their forecasts and plan accordingly, according to the study.

Canadian political leaders are getting the same message. Policy chaos isn't good for business, apparently. The business leaders have no problem with the noble goals of various greenhouse gas policies being developing in Canada, they just wish the country had one national approach rather than a half dozen local ones. Will a uniform emissions policy drive business out of Canada? Just the opposite, apparently.

"This is affecting investment plans," said Tom d'Aquino of the Canadian Council of Chief Executives. "How can you make investment decisions on a 15 or 20 or 25-year horizon if you are living in a country that is totally fragmented on environmental policy? The danger is that of some people saying if Canada can't get it together, maybe we should go somewhere else. People have actually said that to me."

But why stop at national borders? If a national plan is superior to local ones, wouldn't an international policy trump local ones? The Washington Post (registration required) notes the similarity between the European Union plan unveiled last week and Lieberman-Warner bill on the floor of the Senate. The largest businesses in the United States, those with the biggest lobbying clout, already operate under greenhouse gas regulations in Europe. It's hardly a surprise many of these companies are actively pressing for Washington to get on board and bring some conformity to global policy.

Cue President George W. Bush in Monday's State of the Union address:

And let us complete an international agreement that has the potential to slow, stop and eventually reverse the growth of greenhouse gases. This agreement will be effective only if it includes commitments by every major economy and gives none a free ride.

Bush, with his roots in the corporate wing of the Republican Party, is playing catch up to his supposed base. He may try to pitch a voluntary system again this week in Hawaii when he convenes a meeting on climate change. He'll get few takers.

Manipulating the system

The Federal Trade Commission should be aggressive in making sure consumers understand carbon offsets and take a harder look at renewable energy certificates, or RECS, according to a letter signed by nine state attorneys general.

The AGs cite the potential "to manipulate the system" and make the usual plea that feds make sure offsets aren't being double sold - in other words, make sure that if a project cuts emissions by 1 million tonnes, the offsets sold from that project don't total more than 1 million tonnes. Critics cite double selling as a major drawback of retail offsets programs.

They also want clarity on RECs:

The states also demanded that the Federal Trade Commission consider whether renewable energy certificates-proof that energy was generated by a renewable source-should count as a valid offset. The certificates may not qualify as offsets because renewable energy does not always displace traditional energy sources.

The United States requires power companies increase the portion of their output from renewable energy. Many would argue this is a legal mandate, therefore it doesn't meet the standard for 'additionality' and wouldn't qualify as an offset. The FTC could put an end to RECs as an offset, but this won't dent the booming renewable energy business -- although it might cut into offset brokers bottom line. Which isn't necessarily a bad thing.

Next ice age on hold

A group of scientists argue in the journal Science that carbon credits should not be sold for ocean iron fertilization. Several businesses and research centers are pursuing the technique, known as OIF, which has been called the greatest source of cheap carbon capture and sequestration.

In a nutshell, it works like this: Seed the vast lifeless stretches of ocean with iron and plankton will blossom. They'll capture carbon from the atmosphere and when they die they'll take some of that carbon with them to the ocean depths. It's been compared to tree-planting projects, without the threat of fires which release trapped carbon.

Promoters of the strategy like to cite oceanographer John Martin, who said at the famed Woods Hold Oceanographic Institute: "Give me a half a tanker of iron and I will give you another ice age." Apparently he said it with a mock Dr. Strangelove accent, but no matter. Combine that quote with Kyoto Protocol carbon credits and you've got yourself a business model.

The scientists' letter really only affects the funding of the current research, and that mostly spells bad news for Planktos, a penny stock company that's already on shaky ground, according to its financial reports. Other companies include Climos and Sea Green Ventures, which seems to be based in Florida.

Planktos has been outfitting a research vessel and plans to begin conducting larger scale experiments soon. The other companies and government-backed research centers are also preparing research, but it seems most of results are at least a year away.

The scientists aren't trying to stop the research, just slow one avenue of funding, which is the selling of carbon credits. Sensibly, they simply point out that carbon credits shouldn't be sold until its clear the carbon captured is actually retained."However, the efficiency with which OIF captures carbon from the atmosphere and retains it in the deep ocean, is still uncertain and unintended ecological impacts are not yet fully understood."

It remains a promising technology. This is simply a warning to verifiers to steer clear of Planktos, which has been criticized for loose standards and its rush to sell voluntary carbon offsets, which are targeted at consumers and suffer from flimsy standards.

Pessimists were wrong. It's worse.

"The climate crisis is significantly worse and unfolding more rapidly than those on the pessimistic side of the IPCC [International Panel on Climate Change] projections had warned us."

Former Vice President and oracle of inconvenient truths, Al Gore, says climate change is accelerating but adds that all candidates for U.S. president will back policies to address the issue. He argues that a global carbon trading system is critical, which seems fairly obvious when dealing with a global problem.

Gore's influence may be questionable, although his comments about Republicans, even evangelicals, could be read as a sign he's angling for a say regardless of who wins.

At the moment it would seem the U.S. would be a late arrival to climate change party and would have to dance to the music already playing. The nice advantage of always being the 800-pound gorilla is that even if you're last on the dance floor, you call the tune.

The Financial Times points to a way in which the U.S. could quickly force the world to adopt a global greenhouse gas policy: a carbon tax on imports. Of course this would require the U.S. to have its own tax first, but that day may be approaching, once the election is out of the way. The EU also suggested taxing the carbon content of imports in the climate proposals unveiled this week. It's a long way off and the FT lists the lengthy number of hurdles, but the first one -- raising the issue and debating it -- seems to have been cleared.

The 10-step low-carb diet

The European Union president outlined to the European Parliament Wednesday the bloc's plan to cut emissions 20 percent by 2020. While not nearly ambitious enough to satisfy everyone in the green lobby (emission credits won't be fully auctioned until 2020 for some industries, for example), the outline seemed to win general praise.

What will the United States do in response? Several bills are working their way through Congress, but the momentum will shift to the presidential candidates this summer. Should one of those candidates be Hillary Clinton, than the Center for American Progress would probably be a good place to look for clues to her policy.

The center has been described as Hillary's think tank. The organization is led by former Clinton White House chief of staff, John Podesta. He testified before the House Select Committee for Energy Independence and Global Warming on Wednesday and outlined an energy policy that he insisted the next president must put at the center of his ("or her") economic policy.

He outlines 10 steps to move the country from a high-carbon economy to a low-carbon one. He makes the usual noises about the number of jobs that would be created by adopting and developing new technologies.

He fully embraces cap-and-trade, noting that it will happen on a regional level if Washington doesn't act. But he urges Congress to get moving, and emphasizes that emission credit should be auctioned, not freely given. The revenue generated by those auctions should be used to offset the impact on the poor, with 10 percent going to carbon-intensive industries to help them with the cost.

He also argues for steps to end suburban sprawl, increase fuel efficiency of cars, improve the efficiency of the electricity grid, using the buying power of the federal government to promote renewable fuel and helping to fund research into carbon capture technology.

Maybe most striking is his tone. These aren't some policy goals for incremental change.

The urgency of this issue demands a president willing to make the low-carbon energy challenge a top priority in the White House—a centerpiece not only of his or her energy policy but also of his or her economic program—to produce broad-based growth and sustain American economic leadership in the 21st century. This task is so encompassing it will demand that the incoming president in 2009 reorganize the mission and responsibility of all relevant government agencies—economic, national security, and environmental.

He ends by creating a vision of the United States leading the rest of the world in the fight against climate change. After eight years of denial, it's slightly hard to comprehend the potential for changes in 2009.

"It’s not too early to prepare for the emergence of markets"

Minnesota's governor is proposing a planning authority to explore a state-wide carbon market. The state is already a member of the Midwestern Greenhouse Gas Reduction Accord, a five-state project based around the Great Lakes, so it's a bit unclear what the governor is seeking. The state has a goal of cutting emissions 80 percent from 2005 levels by 2050.

“While it’s still too early to know exactly how the carbon credit market will develop, it’s not too early to prepare for the emergence of markets,” Governor Pawlenty said.

The authority seems to be following a similar path as San Francisco. The mayor proposed a carbon offset program that limits the market to the city. On a political level it makes great sense, but San Francisco isn't a very big place with aging gritty steel mills that will be easy to clean up and create credits. This was the whole point of the U.N.'s Clean Development Mechanism - if you need carbon credits, it's easier and cheaper to generate them in the poorer, less developed parts of the world.

"It will not be easy to achieve"

Michigan Democrat John Dingell, the chairman of the House Committee on Energy and Commerce, has outlined his proposal to cut greenhouse gases. Dingell has been scoring higher and higher in recent years in the League of Conservation Voters' eco-friendly rankings. This plan should certainly help. He informs us that:

The earth is getting warmer and human activities are a large part of the cause. We need to act in order to prevent a serious problem. The world’s best scientists agree we need to reduce greenhouse gas emissions by 60-80 percent by 2050 in order to limit the effects of global warming and this legislation will put us on track to do just that.

This is a massive undertaking, and it will not be easy to achieve, but we simply must accomplish this goal; our future and our children’s futures depend on it.

Not easy to achieve? That's his inner evil doctor letting you know 'This might hurt a little.' Nothing's easy in America when you propose getting rid of the mortgage tax deduction on large homes and float the idea of 50 cent per gallon tax.

He's hit on a great point. Large homes, built far from centers of employment and public transit, contribute to sprawl and greenhouse gas emissions. But in case he's missed it, these people are already losing homes at a record rate. The L.A. Times was reporting two years ago, before the word 'subprime' crashed onto the front page, about the toll surging gas prices were having on the McMansion crowd who lived two-hours from the city center and were drowning debts. Congress will have about as much luck stripping their deduction for mortgage interest as they will in taking their guns.

But that's a small point. Dingell's got a plan. A carbon tax of $50 per ton of carbon puts it in the range recommended by former World Bank economist Nicolas Stern, who authored a report on climate change for the UK Treasury. Stern put the social cost of climate change at $85 dollars per ton but in this interview, he seems to say $40 per ton makes important technologies such as sequestration more viable. (There seems to be a lot of confusion over whether tonne or ton is being used and whether the price is for a ton/tonne of carbon or ton/tonne of CO2. Dingell's plan is per ton for carbon).

Dingell's plan also endorses the use of "certified" carbon offsets. The offsets are moving closer to becoming mainstream financial assets, and much now rides on who does the certifying and making those standards transparent, consistent and scandal free.

"It's incumbent upon states to take steps to combat rising carbon dioxide levels"

New Jersey's governor signed into law a bill that requires a 10 percent cut from current levels in power plant emissions by 2019. The law authorizes the state to assign or auction what essentially amount to pollution permits, establishing a cap-and-trade market. If power plants can't meet their required reductions in greenhouse gas emissions, they must buy credits from competing plants that made extra cuts.

The key is how many permits are created and how the permits are distributed. In Europe, too many credits under its previous regime were assigned and prices for carbon collapsed. Also critical - will permits be freely given or auctioned? Critics argue freely distributing permits (as has been proposed) steals clean air from tax payers. New Jersey's effort is part of the Regional Greenhouse Gas Initiative, which is launching a carbon market among 10 East Coast states in 2009. New York plans to auction all of its permits, which should create encourage steeper cuts in emissions by placing a higher price on greenhouse gases.

It's now up to the New Jersey Department of Environmental Protection to decide what to do with those valuable permits. Expect intense pressure from utilities which want to see them handed over.

“We don’t want carbon offsets to become the 21st century version of snake oil and patent medicine.”

Done correctly, carbon offsetting has the potential to cut emissions, reward innovation and send price signals that allocate capital to the most cost-effective projects. It's a great concept, but offsets have no intrinsic value without proper monitoring and verification.

The Fair Trade Commission recently began a series of workshops that put the spotlight on the booming trade in voluntary offsets. They covered many of the problems exposed in a great Businessweek article early last year on offset projects, which boils down to lack of verification and transparency.

It now seems Congress, or at least two Republicans, have taken notice and they requested the Congressional investigative arm, the General Accountability Office, bring sanity to the situation.

“Carbon offsets provide a potentially valuable way for individuals to make direct, personal commitments to environmental quality, but without transparency and reliable evidence of honesty, they seem poised to betray their purchases’ good intentions ... We don’t want carbon offsets to become the 21st century version of snake oil and patent medicine.”

In some cases, it might be too late. Ask Saab.

The automaker launched a curiously named Grrrrrreen campaign (why six Rs?). Australian consumer protections regulators are taking legal action after finding that "its claims of planting 17 native trees would not provide a carbon dioxide offset for any period other than a single year’s operation of any motor vehicle in the Saab range."

It's not just the pushers offering suspiciously sourced offsets that are causing trouble, but it's fair to argue offsets are a victim of their success and imitation. At the moment, it's often just too cheap to buy offsets, thereby having no impact on consumer behaviour. If offsets don't increase the cost of owning and driving a Saab enough to make a Prius a comparable alternative, the offsets probably aren't properly valued.

"It's like the wild west"

This lengthy piece in CFO Magazine makes a solid case for buying carbon credits now, on the cheap, in anticipation of rising prices for carbon credits in a few years when regulation looms. It sounds like most of the executives they spoke with see plenty of room for a voluntary market once the caps are in place and expect to use their purchased credits to meet required cuts.

But here's the rub: Everyone seems to agree the available credits vary wildly in quality and obviously doubt many of them will qualify under the eventual cap-and-trade. That should be obvious to anyone who's done much research into the current batch of sellers of carbon credits and the prices they charge.

This demand in cross-border CO2 projects has led to problems. Stories have already appeared in The Financial Times and elsewhere about manufacturers in India purposely building factories with excessive greenhouse-gas emissions so they can sell the reduction credits. In addition, several reports have documented cases in which sellers of credits have miscalculated carbon baselines, thus bumping up CO2 reductions. "You've got guys saying, 'Hey, we'll get you an offset if you give us some money,'" says Clean Air Watch's O'Donnell. "It's like the Wild West."

The article and the executives and specialists quoted are particularly tough on reforesting projects - don't tell the Super Bowl organizers.

The cost of cap-and-trade

Since a cap-and-trade system seems increasingly likely in the United States, it's worth asking what the impact might be.

And since you asked, the the Environmental Protection Agency and the Energy Information Agency have an answer. It's not nearly as dire as critics want everyone to believe, and for good reason.

The good news: "Impacts on economic growth are modest. By 2030, cumulative GDP losses range from -0.02 to -0.07 percent across the different scenarios analyzed by EIA and EPA."

The bad news: "Total greenhouse gas emissions in 2030 fall from 9.1 to 9.7 billion metric tons CO2 in the “business-as-usual” case to 6.9 to 7.3 billion metric tons under S.1766 -- a 24 to 26 percent decrease."

Why is that bad news? That estimated cut in greenhouse gas emissions isn't much of a cut compared to current levels of emissions, which totalled 7.1 billion metric tons in 2006. Compare that to Britain, which is debating an 80 percent cut in emissions by 2050.

But I suppose it's a start.

Lawmaker promises cap-and-trade bill

Powerful Democratic lawmaker, John Dingell, promises at the Detroit Auto Show that he will introduce a bill to launch a cap-and-trade approach to cutting greenhouse gas emissions in the United States, according to Reuters. This is one of several efforts underway and it's unclear whether anything will pass in an election year, but that's not really the point. Dingell has made his reputation as a reliable battler ready to take on the environmentalists. His change of heart is the surest signal that United States is close to adopting a European-style emissions trading system. Wall Street wants this, the green lobby wants it, several states in the Northeast are already committed to it. Even big business wants it. The United States effectively demonstrated how a cap-and-trade might work with the success of a similar system to control sulphur emissions that contribute to acid rain. Dingell may not want it, but he wants to be in control of the debate and like the administration, he knows the country will join the global effort to cut greenhouse gas emissions. This is about having a hand in the way it's done.