The TH Interview: Jason Smith, CEO of DriveNeutral

At TerraPass, we share Jason's sentiment about the carbon offset industry. Having some healthy competition is great for consumers and great for the environment, and I think all players in this industry are focused first and foremost on the big picture of trying to address global warming.

However, we do feel it necessary to respond some of Jason's comments about RECs. Certainly there is room for difference of opinion, and presumably Jason is sincere in his thoughts about the REC market. However, many of those opinions are deeply outside the mainstream.

Trading on the CCX began in 2003, making it a relative newcomer to the greenhouse gas abatement market. Today trading volume on the CCX is about 2 million tons annually.

The REC market in the U.S., by contrast, is about 20 million tons annually. Over 40 states have laws governing the definition and issuance of RECs. Over 600 green power programs based on RECs are now in existence in the U.S. Extremely sophisticated corporate buyers such as Whole Foods use RECs as a critical element of their carbon reduction strategies. To suggest that RECs are somehow excessively risky or lack proper protocols is to deny the existence of a thriving, mature market in renewable energy.

Jason also suggests that the risk of double-counting of RECs is high. In actual fact, the risk of double-counting is virtually nonexistent in today's market. And although double-counting is an important theoretical issue, it is also an issue that is quite solvable. For example, it has been already been addressed from a policy standpoint in the Kyoto Protocol. We have every reason to believe that similar policy safeguards will be enacted in the U.S. when they are needed.

Jason downplays the relevance of the Green-e program. Others feel differently. Daniel Lashof, science director of the climate center of the Natural Resources Defense Council, is quoted in the New York Times saying that the Green-e program is the only "uniformly accepted standard for what constitutes a valid reduction in global warming pollution."

Jason postulates that RECs won't be a part of any cap-and-trade emissions program in the U.S. If he's right, it would be a tragedy for the environment. Why would a program whose ostensible goal is to reduce greenhouse gases specifically exclude the largest thriving U.S. market in pollution reduction? Fortunately, historical precedent suggests that this prediction is wrong. Wind power and other renewables are included in the system of carbon trading set up by the Kyoto Protocol. There's no reason to think they won't also play a role in the U.S.

We certainly do agree with Jason that not all carbon credits are created equal. The carbon credit industry is complex, and many of the nuances and technical aspects of the industry are not well-understood by average consumers. However, suggesting as Jason does that CCX is good and RECs are bad is not a way to be "honest and clear" with customers.

At TerraPass, we support both the CCX and the REC market, and carefully select a portfolio of projects that further various environmental goals. In all cases, regardless of what type of purchase we're making, we only select projects in which we have the highest confidence that the carbon reductions are real.

One of the the most important goals in this industry is educating people about new ways to fight climate change. We welcome dialogs such as this one, and are glad that organizations such as DriveNeutral are helping to spread the word.

Nice debate! What's the prognosis to grow the CCX? It *seems* like it's more objective. Will the CCX move more into the REC market?

Thanks Adam for adding Terrapass's perspective to the conversation.

I would like to make it clear, however, that DriveNeutral does not think CCX is good and RECs are bad. In fact, as suggested in the interview, DriveNeutral is combing through various REC offerings in an effort to expand our portfolio of high quality offsets as well. However, our hesitation to jump into the REC market is not as “out of the mainstream” as Adam suggests.

EPA is already on the record in strong opposition of RECs-as-offsets. So are Environmental Defense, NRDC, Sierra Club and many non-advocacy groups with experience in tradable emission rights. For example, EPA does not permit participants in its voluntary Climate Leaders program (which include
American Electric Power, Cinergy, Excelon, Public Service Electric and
Gas, Florida Power and Light, 3M, DuPont, IBM, AMD, Baxter Chemical,
Miller Brewing, Pfizer, Johnson & Johnson, GM and about 60 more
companies) to count RECs toward achieving their 2012 emission reduction
target.

RECs current trading volume alone does not guarantee quality of offsets. I am in no way denying the existence of a “thriving” market but this does not indicate that the correct protocols, and more importantly, enforcement of protocols are in place. Volume should not act as a substitute for value or integrity.

The Green-e standards are a big step in the right direction but the means of enforcing those standards are still lacking. Green-e is a welcome development in our industry and we at DriveNeutral fully support the 3rd party verification of RECs that Green-e provides. However without going into the double counting issue too deeply, the biggest difference between the RECs and the Carbon Financial Instruments sold on the CCX is accountability. Members of the CCX are not only bound by strict regulations, they are also subject to severe penalties (both legal and financial) for non-compliance. The CCX is monitored by the NASD (a private-sector regulator of America's securities industry). This is very significant and should not be understated.

The idea of whether or not RECs are "excessively" risky is a decision only a well informed purchaser can make. In the interview, I suggest that most people do not find the risk unacceptable. That view contrasts with the prevalent view in the media, such as in the recent article in salon.com, that "buyers must beware" in the REC market. Frankly, I think this "caveat emptor" perspective, while popular with journalists, overstates the case.

None the less, I think it is important to note the distinctions between the two most popular sources for consumer offsets and to be clear about the costs and benefits of each so that these methodologies are not lumped together.

In helping to develop and mature these markets, some degree of risk seems to be acceptable to all participating parties. The point is to be clear about what risks take place where.

Certainly CCX is not without its detractors. None the less, in DriveNeutral's early development we felt, and to some degree still feel, that CCX credits are of the highest quality available in terms of guaranteed and third-party-verified greenhouse gas emissions reduction.

I think it is important not to polarize these issues at all. RECs are not bad. CCX credits are not bad. Taken as a whole, what matters most is that we push both markets to achieve the greatest amount of real and lasting emissions reductions in the shortest amount of time. Toward that goal, Terrapass and DriveNeutral are dedicated partners.

As DriveNeutral and Terrapass continue to evaluate the merits of selling offsets sourced from the CCX, and as readers consider buying them, I would recommend reading the the article by Jeff Goodell published in the New York times on July 30, available at http://www.nytimes.com/2006/07/30/magazine/30carbon.html.

In relevant part, it reads:

“In the three years that CCX has been in operation, criticisms from environmentalists have only grown. This is particularly the case with CCX’s standards for using agricultural offsets, in which carbon is sequestered in farmland soils and then sold for emissions credits. Agricultural offsets are notoriously difficult to measure and quantify, and a less-than-rigorous program is essentially a way of introducing overvalued emissions allowances into the trading system. Advocates of carbon trading like Environmental Defense have worked hard to develop stringent protocols for soil sequestration, while others, like David Doniger, the climate policy director at the Natural Resources Defense Council, remain skeptical of the whole concept. “The problem with these kinds of offsets is that we’ve never found a way to separate the wheat from the chaff,” Doniger told me. “There is a constant tension between quality control and high participation rate. And it’s usually quality that goes in the toilet.”
To check this out for myself, on a rainy afternoon this spring I drove a few hours southwest of Omaha to visit Steve Wiese, a 51-year-old farmer who earns extra money by sequestering carbon on his 2,500-acre farm and selling the carbon allowances on CCX. When I arrived, Wiese was going over some paperwork in his barn. On his desk was a check for $2,008.94. “It just came in the mail the other day,” Wiese said, waving it happily.
Wiese, like hundreds of other farmers who are getting paychecks from carbon emitters by way of CCX, practices a form of cultivation known as no-till. Instead of tearing up the fields each spring and releasing the carbon stored in the soil (mostly in the form of decomposing plant matter and roots), no-till farmers plant right over the previous year’s crop, leaving the soil undisturbed.
“How long have you been no-tilling?” I asked him.
“About 14 years,” he said, leaning back in his chair.
“How long have you been getting paid by CCX?”
“Just signed up last year,” he said.
Here was an instance of a major problem that critics of CCX have raised: Wiese is getting paid for storing carbon in his soil, even though he has done nothing to increase the amount of carbon that is being stored on his land — he’s just doing exactly what he’s been doing for the last 14 years. A polluter like A.E.P. or Ford can use a credit from Wiese’s farm to offset their greenhouse gas emissions, but the fact is, in cases like these the payments from CCX are having no net effect on the level of greenhouse gases in the atmosphere.
And Wiese is hardly alone. Of the half-dozen farmers I spoke to in Nebraska and Iowa, all had started no-tilling before they ever received a check from CCX. When I asked Sandor about this, he argued that it doesn’t matter if these agricultural reductions are “real” or not, because they make up only a small fraction of CCX’s overall reductions. “What’s important,” he told me, “is to incentivize people who are doing the right thing. I think of these payments as a kind of ‘tickler.’ ” To critics like Doniger, though, the problem is that Sandor doesn’t advertise these kinds of offsets as a “tickler” — he advertises them as actual improvements in the atmosphere.
Environmentalists have also raised questions about another aspect of CCX: how it calculates emissions reductions. Sandor regularly notes that CCX members reduced carbon emissions by 14 million metric tons in 2003 and 30 million metric tons in 2004. (2005 numbers aren’t available yet.) That is, of course, a good thing. But it’s not clear that CCX should get the credit.
Consider the case of DuPont. Overall, DuPont’s carbon dioxide emissions are down 72 percent since 1990 — an example, according to Edwin Mongan, the director of energy and environment at DuPont, of “what a company can do if it sets its mind to it.” DuPont has beat its CCX baseline by more than 50 percent, cutting emissions by 8 million metric tons more than required. “We’re supportive of CCX because it has given us experience trying out selling, working in a carbon market,” Mongan told me. But he also suggested that being a member of CCX has not, in itself, led to reduced emissions. “I think CCX has been most valuable to us in helping to certify and validate the emissions cuts that we’ve already made,” he said.
The fact that companies like DuPont are reducing their carbon emissions does not mean that the emissions reductions trumpeted by CCX are necessarily unreal. But it may mean that these reductions are mostly the result of good corporate citizenship, not the power or efficiency of Sandor’s market.
Unfortunately, sorting out the real from the unreal is not always easy with CCX projects.”

My view? The voluntary market is fragile enough without companies hawking offsets of dubious pedigree.

Interesting points Todd. I think that a discussion of RECs and CCX credits should include the merits and weaknesses of both. Thanks for giving this discussion more depth.

In fact, as Sandor indicates, very few credits on the exchange come from the sources you mention. Some retail offset companies appear to intentionally seek these credits out due to their agricultural nature. That is, they are generally more exciting to retail customers than are energy efficiency credits, so some retail offset companies swoop them up to sell.

DriveNeutral does not seek these credits out. Currently we purchase undifferentiated credits. The vast majority of these credits come from energy efficiency and renewable energy practices from member companies reducing their carbon footprint.

I agree with you Todd. It is very important to push these markets to deliver the highest quality credits available but we do want to push big corporations to get involved not to ignore these markets. If less than 5% of the credits on the market serve as "ticklers", than so be it. The other 95% turn that tickle into a tremor and the world begins changing for the better one company or one car at time. This is far more effective than focusing all of our efforts on lobbying for government designed top-down mandates, while in the interim only business as usual persists. Businesses build better markets than governments anyway.

I think Sandor sums up the various debates occurring around the CCX and REC markets very well when he says, “At a certain level, all this becomes a debate about how many angels can dance on the head of a pin. In the larger scheme of things… [g]lobal warming is an extremely urgent problem. Is CCX perfect? Of course not. Neither was the U.S. Constitution — they forgot the 10 amendments, including freedom of the press and freedom of speech. The important point here is that markets work to solve problems. The sooner we admit that, and the sooner we get around to building those markets, the better.”

What DriveNeutral aims to do is help the public participate in these markets with a good degree of confidence. Furthermore, we think that a large segment of the public does care about the details. They want to know what each of these markets look like from the inside out. We aim to help them learn and know as much or as little as they want to about the markets; the good, the bad, and the ugly. As a non-profit enterprise of Presidio School of Management, education is half our reason for existence.

Hi Jason - do your "undifferentiated credits" include those generated by DuPont? If the article is correct, DuPont is generating them in the ordinary course of business, and so they lack the "additionality" required for a bona fide offset.

Todd: We have never purchased credits directly from DuPont. However, if we had, I am not following you on the question of "additionality". DuPont has chosen to join the exchange because it has given them experience selling and working within a carbon market. That is one of the reasons DriveNeutral is committed to the CCX. Once members join, they can begin to participate with other large scale emitters in a cooperative market for emissions reductions instead of merely reducing emissions in isolation.

If there were not member companies who were ready to make reductions when they joined there would be no sellers and therefore no buyers in the market. I think what DuPont has achieved is remarkable and I can see no reason not to allow them to use their activities to generated credits on the CCX.

In my mind, business as usual should include an ever decreasing carbon footprint. It would appear that DuPont and the CCX agree on this point. Why do you disagree?

Maybe you could say more about what a "bona fide offset" is vs. an achieved schedule of emissions reductions?

For an emissions reduction to be credited as a bona fide marketable offset, under the Kyoto Protocol, and likewise in the voluntary market, it must have "additionality." Specifically, the activity that produces the emissions reduction must have been undertaken specifically for the purpose of reducing CO2 emissions AND it must be an activity that would not have been undertaken without the opportunity to realize value for the emissions reductions. Assuming Goodell is quoting DuPont correctly, DuPont is saying "we'd be doing this anyway." No additionality. No offset.