Psst -- wanna buy some cheap carbon credits?

CNN.com recently reported on a new company called TerrraPass that is offering us the opportunity to turn our gas guzzling cars into zero emission vehicles for less than 11 cents a gallon ("So long to gas guzzler guilt"). This is not the case of some innovative engineering, but economics at work.

Here's how TerraPass does it. Suppose you own a 2005 Jaguar XKR convertible and that your trips back and forth to the golf course amount to 10,000 miles per year. According to the TerraPass web site, this means that you're using about 513 gallons and emitting 10,036 pounds of CO2 every year. Now for the good news. If you pay $49.95 for a Standard TerraPass, the company promises to take your money and pay other folks to reduce their CO2 emissions by an equivalent amount; offsetting all your CO2 emissions -- and they'll send you a bumper sticker to boot!

How do they offset your CO2? Here's an example. TerraPass claims to have recently paid for an anaerobic digester on the Joseph Gallo Farms in California. In other words, the farm captures the fumed generated by the cows, burns the stuff, sells the energy to the electrical grid. Presumably, TerraPass gives them a few dollars to make the whole thing economically viable. The methane from the cows doesn't go up to the atmosphere and the coal at the power plant doesn't get burnt -- a win-win solution.

The first thing that struck me when reading about TerraPass was how cheap it would be to turn my car into a ZEV. To put things in perspective, between the end of February and the beginning of April 2005, the average price of gas went up by 30 cents a gallon. Yet at the TerraPass price, for than only 11 cents we could find ways to offset the emissions of CO2 in the U.S. At first glance, it looks like a pretty good thing and maybe we should require everyone in the nation to buy a TerraPass for their car.

But the first sign that this approach can't be extended too far comes when we compare the TerraPass price to the price of carbon offsets in Europe. In the EU, where nations have signed the Kyoto Protocol, there's a real market for CO2 emissions. Companies are being required to either control their CO2 emissions or pay others to do it for them and the price for a metric ton CO2 credit in the EU ETS market was recently up to 23 Euros -- that's $27/ton. TerraPass is only charging the equivalent of about $12 per ton.

So why are these TerraPass credits so cheap? Well, it comes from a well known economic phenomenon -- the upward sloping supply curve. Compared to Europe, the demand for CO2 reductions in the U.S. is essentially nil. All there is a voluntary market called the Chicago Climate Exchange, where credits are selling for $1.50 per ton meaning that compared to its nearest competitors, the TerraPass price is quite high. But as seen in the EU ETS price, both of these U.S. prices are extremely low relative to what we'd probably find if the nation took serious steps toward reducing its CO2 emissions. TerraPass is able to buy the cheapest possible credits, what we frequently refer to as "low-hanging fruit". Indeed, the fruit they're selling might be so low that it is already sitting on the ground. "Credits" that are being bought and sold by TerraPass might be essentially standard operating procedures if the U.S. accepted a Kyoto obligation.

So where does this leave us with respect to TerraPass? It's a nice idea for those that want to make an environmental point on the bumper of their car, and it's probably cheaper than paying the extra money for a hybrid Toyota Prius. But TerraPass is not a long term or major-impact approach to the nation's CO2 emissions. If serious efforts to address CO2 emissions were actually undertaken, I'm quite sure we'd push up that supply curve pretty fast, and the result would be price at the gas pump that might make March of 2005 look appealing. At those prices, the Prius might look a lot more attractive and that's the kind of incentive that would really make an impact.

Comments

[Jim Sinner]

Given low-hanging fruit, it makes sense to pick it. This pushes everyone coming later up the supply curve. Companies or individuals who are then seeking a public image of having offset their emissions will have to pay a higher price, i.e. one that is closer to the true marginal cost of greenhouse gas emissions.

There remains the question of whether the fruit is actually "lying on the ground". It would be preferable to have an independent verification of "additionality" such as that provided by the FCCC's CDM Board.

[Tom Arnold]

Rich:

Great overview of the price issues. I agree that there is a supply/demand imbalance here. And that lets us sell a TerraPass at a very affordable price.

One note on Kyoto is that price may be distorted by the huge bureacracy around CDM projects. Only 9 MT have been approved by the board so far, a small fraction of total demand for compliance.

In the US, of course, the demand is much lower. And that means that projects can extract less from purchasers. For the very technical reader, we meet Gree-e standard of additionality on the REC side and are working with a 3rd party verifier for all our projects (should be done by late summer).

Thanks again for your interest.

Tom

[City Hippy]

Awesome...someone linked to this article from an article recently on our site about how to make your car greener.

Terrapass sounds great. Keep up the good work.

Namaste

Al

[TDM]

A company based on arbitrage in private emissions markets. I recall another company that once had a very successful business in arbritage in energy markets. That company was ... Enron. It didn't help that the rest of their business was basically vapor. I predict TerraPass's future will depend on whether they will insist on growing even if arbitrage opportunities do not.

[Lesley Carlson]

We would like to point out that Carbonfund.org (www.carbonfund.org) is a nonprofit organization offsetting CO2 in much the same way but for just $5.50 per ton of CO2. As a nonprofit, additionally, donations by individuals or companies are tax deductible.

Our goal is to make carbon offsts cheap and easy to purchase so they will become widely popular to a mass audience. By keeping costs down and not profiting from the venture we aim to reach a larger audience.

Many thanks,

Lesley Carlson
Carbonfund.org

Do they sell the credits they buy? Or keep them? If they sell them, then they just put that carbon back into the environment. This only works if they are keeping them -- essentially sequestering that carbon. Anybody know?

[allen claxton]

Do they sell the credits they buy?

Yes. They're selling them to you, the purchaser/driver.

[Tim Patrick]

I own over 400 acres of forest - guess my carbon footprint is covered - now to all the rest of you - live in tents without electricity and use a skateboard to get around - I'm covered - want to buy some carbon footprints from me - I will sell them cheaper than anyone - and by the way - I'll provide a decal so you can feel all warm and fuzzy.

does this sound like a current version of medieval indulgences to anyone else?

[odograph]

"does this sound like a current version of medieval indulgences to anyone else?"

No.

(Because carbon sources and sinks are physical things in our world that can be measured. They are not spiritual things only seen or counted by Angels.)

[mcmalo]

you wrote: (Because carbon sources and sinks are physical things in our world that can be measured. They are not spiritual things only seen or counted by Angels.)

hey..I love that one.

now let's take this point of view. If CO2 makes the world warmer/hotter then essiantally is a way of satan to bring earth closer to hell and farther from heaven.
therefore everyone should bear holy war against global warming as our fate in this life and the other is at stake. So christians should by terrapass for that reason

for the rest of us. we will buy because science says it is good for the environment

[Patrick Wood]

Here is another take on the supply demand issues raised in your discussion. I am writing on behalf of AgRefresh (www.agrefresh.org). We sell a Composite Carbon Credit (www.carbonfreedom.org). I am not here to plug our product particularly I am simply stating my affiliations to be transparent.

In addition to a low demand in the US due to the non-existence of a cap and trade system there is also an issue of quality. The lack of regulation in the US markets allows for the availability of cheap credits in the US. Even the Chicago Climate Exchange is not known for its environmental integrity that is part of why they can sell such cheap credits. I agree that it is efficient to pick the low hanging fruit, but you make cider out of the apples on the ground, you don’t shake them off the tree.

You get what you pay for. There is rigorous science, certification, and environmental accounting associated with the creation of credits in EU markets. That is part of why they are more expensive. The discussion has touched on professional documentation, and third party certification. There are 4 other concepts in environmental accounting that I want to mention:

Buying an offsets versus actually reducing your emissions: Rich, your SUV will never be a ZUV. Maybe someday you will be able to buy a new SUV that is engineered to have zero emissions, but not yet. Buying an offset does not change your vehicle. To their credit as TerraPass says, “The first step you can take to fight global warming is to reduce your carbon footprint through conservation. Drive less. Turn down the thermostat. Buy locally produced goods.” (http://www.terrapass.com/about/index.html) Then make a purchase to offset only what you can’t reduce. This is the theory behind carbon offsets. If we each continue to pollute at the same rate, purchasing offsets will not solve the problem.

Additionality: To Tim with the 400 acres of forest. Buy selling really cheap credits from your private forest, you would not have created any new change in the world. I sincerely applaud you for keeping 400 acres open and forested, you are doing a great service to the world, but since you have not created any new emissions reductions your credits would be worthless by environmental accounting standards.

Bundling: Ecosystems are dynamic in space and time. Offseting carbon is only one problem that is associated with driving a car. If buying a credit evaporates all of your Gas Guzzler guilt, then try to open your eyes. A “composite credit” is designed to address a number of quantitative and qualitative environmental impacts, aka a bundle of ecosystem services not just the waste absorption capacity of GHGs by the atmosphere.

Who is the primary beneficiary of the sale of the credits? A broker or the actual producer of the credits (in some cases the broker owns these rights as well). I hope that TerraPass gives its farm partners more than “a few dollars” from the sale of the credits. At AgRefresh we pass 66% of our sales on to our farm partners.

In our business (www.agrefresh.org) we strive to create and sell a credit of superior quality and integrity on par with European credits. We believe that quality demands a high price (www.carbonfreedom.org).

[Victoria]

Gosh, you all are naive. Selling carbon credits is nothing more than a scam, and the companies which do this should be put out of business by the attorneys general of the states in which they exist. Hard to believe how easily some people are conned.

[Rick]

This is the modern equivalent of selling the Brooklyn Bridge or swamp land in Florida