Coyote Blog

From Steven Malloy:

Congress
began investigating the carbon offset industry this week. The inquiry
could produce some "inconvenient truths" for Al Gore and the nascent
offset industry.

Carbon offsets ostensibly allow buyers to
expunge their consciences of the new eco-sin of using energy derived
from fossil fuels. Worried about the 8 tons of carbon dioxide (CO2)
emitted each year by your SUV? Similar to the indulgences offered by
Pope Leo X in the 16th century, you can absolve yourself of sin by
purchasing $96 worth of CO2 offsets "“ typically offered at $12 per ton
of CO2 emitted "“ from offset brokers who, in turn, supposedly use your
cash to pay someone else to produce electricity with low or no CO2
emissions....

A
Capitol Hill staffer told me that the congressional inquiry would look
into the possibility of "double-dipping" in the offset industry.

Only double-dipping?  Earlier, I argued that the purveyors of offsets may be triple dipping:

1. Their energy projects produce electricity, which they sell to
   consumers.  Since the
   electricity is often expensive, they sell it as "CO2-free"
   electricity.  This is possible in some sates -- for example in Texas,
   where Whole Foods made headlines by buying only CO2-free power.  So the
   carbon offset is in the bundle that they sell to
   electricity customers.  That is sale number one. 
2. The company most assuredly seeks out and gets
   government subsidies.  These subsidies are based on the power being
   "CO2-free".  This is sale number two, in exchange for subsidies. 
3. They still have to finance the initial construction of the plant, though.  Regular heartless
   investors require a, you know, return on capital.  So Terrapass
   finances their projects in part by selling these little certificates that you
   saw at the Oscars.  This is a way of financing their plants from people
   to whom they don't have to pay dividends or interest "”just the feel-good
   sense of abatement.  This is the third sale of the carbon credits.

Anybody who has been a part of a productive business (e.g. so this excludes almost all politicians and academics) will probably have experience with some type of profit improvement program.  Usually you are doing about a hundred things simultaneously to reduce costs.  When costs actually go down, you find yourself scratching you head - what actually made the difference.  Everyone will claim that their program or initiatives saved the company X amount of money, but when you add up all the X's, you get a number four or five times the actual improvement. 

Well, apparently the same dynamic occurs in carbon offsets:

An investigation by the Financial Times
suggests that many carbon offsets are illusory, and that there is
little assurance that purchasing carbon offsets does much of anything
to reduce carbon dioxide emissions. Specifically, the report found:

-
Widespread instances of people and organisations buying worthless
credits that do not yield any reductions in carbon emissions.

- Industrial companies profiting from doing very little "“ or from
gaining carbon credits on the basis of efficiency gains from which they
have already benefited substantially.

- Brokers providing services of questionable or no value.

- A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

Who in the world would have every predicted this?  Well, it turns out a lot of people did, including me.  For example, I suggested that companies like Terrapass are probably selling their CO2 offsets at least three times:

1. Their energy projects produce electricity, which they sell to
   consumers.  Since the
   electricity is often expensive, they sell it as "CO2-free"
   electricity.  This is possible in some sates -- for example in Texas,
   where Whole Foods made headlines by buying only CO2-free power.  So the
   carbon offset is in the bundle that they sell to
   electricity customers.  That is sale number one. 
2. The company most assuredly seeks out and gets
   government subsidies.  These subsidies are based on the power being
   "CO2-free".  This is sale number two, in exchange for subsidies. 
3. They still have to finance the initial construction of the plant, though.  Regular heartless
   investors require a, you know, return on capital.  So Terrapass
   finances their projects in part by selling these little certificates that you
   saw at the Oscars.  This is a way of financing their plants from people
   to whom they don't have to pay dividends or interest "”just the feel-good
   sense of abatement.  This is the third sale of the carbon credits.

I also suggested that there is an incredible opportunity for outright fraud:

This type of thing is incredibly amenable to fraud.  If you sell more
than 100% of an investment, eventually the day of reckoning will come
when you can't pay everyone their shares (a la the Producers).  But if
people are investing in CO2 abatement -- you can sell the same ton over
and over and no one will ever know.

Finally I argued that many of the abatement numbers make no sense:

Something smells here, and it is not the cow-poop methane.  This 100,000 pound [CO2 Offset] coupon retails for $399.75 (5x79.95) on the TerraPass web site.
First, this rate implies that all 300 million Americans could offset
their CO2 emissions for about $100 billion a year, a ridiculously low
figure that would be great news if true. 

Lets look at solar, something I know because I live in Arizona and have looked at it a few times.  Here is the smallest, cheapest installation
I can find.  It produces 295 CO2-free Kw-hours in a month if you live
in Phoenix, less everywhere else.  That is enough to run one PC 24
hours a day -- and nothing else.  Or, it is enough to run about 10
75-watt light bulbs 12 hours a day -- and nothing else.  In other
words, it is way, way, way short of powering up a star's Beverly Hills
mansion, not to mention their car and private jet.  It would not run
one of the air conditioning units on my house.  And it costs $12,000!
Even with a 20 year life and a 0% discount rate, that still is more
than $399.75 a year.  For TerraPass's offset claim to be correct, they
have to have a technology that is one and probably two orders of
magnitude more efficient than solar in Arizona.

[update:  Al Gore's house 221,000 kwH last year.  Call it 18,400KwH
per month, that would require about 62 of these solar installations for
$744,000.  I don't think $399.75 is really offsetting it]

I don't have any inside information on TerraPass, the company made famous by providing the $399.75 certificates that offset all your emissions for a year.  I do know that the numbers don't seem to add up, as I wrote here and Protein Wisdom similarly wrote here.

However, I thought about their business model some (since I have been on a role with new business models) and it strikes me that it is brilliant.  Because I am almost positive that they are (legally) reselling the same carbon credits at least three times!

Think of TerraPass not as a company that hands out little certificates, but as a business who makes money through energy projects.  These projects generate electricity without producing CO2 (e.g. wind), or in the case of their cow-poop projects they generate electricity by converting a very bad greenhouse gas (methane) to a less bad one (CO2).

So, for each Kw they generate, there is a certain number of tons of greenhouse gas emissions avoided vs. if they had generated the same Kilowatts with fossil fuels.  (How many tons depends on what fuel you assume the power would have been made with -- my guess is they assume coal, since that gives them the biggest offset, though in fact the marginal fuel in most areas is natural gas in peaking turbines, which produces a lot less CO2).

Anyway, they can claim some number of tons of avoided CO2.  But I am pretty sure they are reselling these abated tons at least three times!  Here is how I think it works:

1. Their energy projects produce electricity, which they sell to consumers.  Since the
   electricity is often expensive, they sell it as "CO2-free"
   electricity.  This is possible in some sates -- for example in Texas, where Whole Foods made headlines by buying only CO2-free power.  So the carbon offset is in the bundle that they sell to
   electricity customers.  That is sale number one. 
2. The company most assuredly seeks out and gets
   government subsidies.  These subsidies are based on the power being
   "CO2-free".  This is sale number two, in exchange for subsidies. 
3. They still have to finance the initial construction of the plant, though.  Regular heartless
   investors require a, you know, return on capital.  So Terrapass
   finances their projects in part by selling these little certificates that you
   saw at the Oscars.  This is a way of financing their plants from people
   to whom they don't have to pay dividends or interest "”just the feel-good
   sense of abatement.  This is the third sale of the carbon credits.

All, by the way, entirely legal, though perhaps not wholly ethical if you really care about reducing CO2 emissions and not just being able to cover your ass to smugly deflect criticism.  This is actually a brilliant way to finance electricity projects, one that Enron wasn't even smart enough to dream up.

And there is nothing wrong with buying these certificates.  The International Star Registry has sold thousands (millions?) of people on the idea that they can have a star named after themselves.  Of course, no actual official body that names stars accepts these as real names, but that's OK, the certificate kind of makes a cool graduation gift (friends of ours did the ISF thing for my father-in-law after he died and my wife really liked it).

Postscript:  By the way, this ignores the ability of such a company to resell the same credits to multiple certificate holders, since the whole CO2 credit thing is pretty damn hard to audit and no one is even trying.  I don't think these guys are doing so, but someone will think of it.