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.

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.

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.

“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.