Green Tech

The Obama administration's greenhouse gas ruling Monday was meant to send a warning to industry, the U.S. Congress, and the world: with or without a law, Washington will tackle global warming in a serious way.

The Environmental Protection Agency issued a final ruling that greenhouse gases endanger human health, allowing it to put limits on emissions even if U.S. lawmakers fail to pass a law to achieve the same objective.

These are the ramifications of the long-expected decision:

• Timing: as the EPA made its announcement, negotiators from nearly 200 countries met in Copenhagen to work toward a political agreement to address climate change.

The timing was no coincidence: the EPA announcement was aimed at an international audience as much as a domestic one.

The U.S. position at the talks is undermined by not having a domestic law in place to curb emissions, but the EPA ruling should reassure other nations that Washington will force businesses to reduce their greenhouse gas pollution one way or another.

Obama's message to world leaders: the United States is a serious partner in Copenhagen and on the climate change issue as a whole.

• Pressure: The House of Representatives has passed a bill that would cut U.S. greenhouse gas emissions but the Senate has not. As lawmakers go back and forth on whether such rules would be good or bad for industry and the country, the EPA ruling will now be firmly in the back of their minds.

Obama's message to lawmakers: hurry up and agree on a law, or the administration will take the reins and accomplish this goal without you.

• Risk: Though the White House has given the green light to the EPA finding, officials near Obama would prefer not to talk about it that much. Why? The president still firmly prefers a legislative solution to the problem of regulating carbon dioxide and other greenhouse gas emissions.

By making the threat that regulation will result if a law fails, Obama risks having to actually follow through.

Politically it will be more palatable for the president to tell Americans--especially in coal-producing states that will be hard hit by emissions curbs--that rules governing climate change were approved by their elected representatives rather than imposed by the executive branch.

If the economy does not recover soon, the short-term costs to industry of regulation could create long-term costs for Obama, whose fellow Democrats could lose seats in Congress.

Practically, EPA regulation could also get tied up in a series of legal challenges from businesses and environmental groups. A law would be less messy and potentially more efficient at cutting emissions quickly.

• Certainty: Companies often say certainty is crucial for business planning. Even those that are opposed to climate legislation or EPA regulation- and there are many--would prefer knowing what's coming to not knowing, even if the ramifications are costly.

With the EPA's announcement, pending legislation in Congress, and the U.S. position in Copenhagen all spelled out, industry can now assume that, one way or another, the United States will aim to reduce its greenhouse gas emissions roughly 17 percent from 2005 levels by 2020.

For those that have not already started, making investments to cut industrial emissions and reduce carbon pollution would make sense...now.

This analysis was written by Jeff Mason.

Story Copyright (c) 2009 Reuters Limited. All rights reserved.

LONDON--The head of the U.N.'s panel of climate experts rejected accusations of bias on Thursday, saying a "Climategate" row in no way undermined evidence that humans are to blame for global warming.

Climate change skeptics have seized on a series of e-mails written by specialists in the field, accusing them of colluding to suppress data which might have undermined their arguments.

The e-mails, some written as long as 13 years ago, were stolen from a British university by unknown hackers and spread rapidly across the Internet.

But Rajendra Pachauri, who chairs the Intergovernmental Panel on Climate Change (IPCC), stood by his panel's 2007 findings, called the Fourth Assessment Report (AR4). "This private communication in no way damages the credibility of the AR4 findings," he told Reuters in an e-mail exchange.

This report helped to underpin a global climate response which included this week carbon emissions targets proposed by the United States and China, and won the IPCC a share of the 2007 Nobel Peace Prize.

The e-mails hacked from Britain's University of East Anglia last week showed scientists made snide comments about climate skeptics, and revealed exchanges about how to present the data to make the global warming argument look convincing.

In one e-mail, confirmed by the university as genuine, a scientist jokingly referred to ways of ensuring papers which doubted established climate science did not appear in the AR4.

Pachauri said a laborious selection process, using only articles approved by other scientists, called peer review, and then subsequently approving these by committee had prevented distortion.

"The entire report writing process of the IPCC is subjected to extensive and repeated review by experts as well as governments," he added in a written statement to Reuters.

"There is, therefore, no possibility of exclusion of any contrarian views, if they have been published in established journals or other publications which are peer reviewed."

"This thoroughness and the duration of the process followed in every assessment ensure the elimination of any possibility of omissions or distortions, intentional or accidental."

In another e-mail, according to news accounts, Kevin Trenberth, a climatologist at the National Center for Atmospheric Research, wrote: "The fact is that we can't account for the lack of warming at the moment and it is a travesty that we can't." The revelation of the e-mails was more embarrassing than serious fodder for doubts about the causes of, or basis for climate change, scientists responded this week.

"It is unfortunate that an illegal act of accessing private e-mail communications between scientists who have been involved as authors in IPCC assessments in the past has led to several questions and concerns," said Pachauri.

Story Copyright (c) 2009 Reuters Limited. All rights reserved.

WASHINGTON--A key U.S. Senate environment committee approved a Democratic climate change bill on Thursday that would require industry to cut emissions of carbon dioxide and other greenhouse gases 20 percent by 2020 from 2005 levels.

The bill approved by the Environment and Public Works Committee will now become one of several initiatives in the Senate aimed at attacking global warming. But they are unlikely to produce legislation that would be voted on by the full Senate until next year at the earliest.

With Republicans boycotting the environment panel's measure, saying more analysis of the legislation was needed, 10 Democrats approved the bill and one Democrat, Sen. Max Baucus, voted against it.

Sen. John Kerry, who co-authored the bill with fellow Democrat Barbara Boxer, is leading an effort with some Republicans and the White House to draft a compromise.

Democrats in Congress, working on a major plank of President Barack Obama's agenda, have been anxious to show at least some progress on enacting a domestic climate change bill before December 7, when an international global warming summit convenes in Copenhagen.

While there were scores of amendments to the bill that environment committee members wanted to debate and vote on before approving it, they were unable to because of the Republican boycott.

Under committee rules, at least two Republicans had to be present to debate and vote on changing the bill.

Boxer delayed work on the legislation for two days, saying she was giving Republicans the opportunity to collect more information from EPA officials and to offer their own amendments.

But Republicans did not take her up on the offer and by Thursday, Boxer had lost patience with the delay.

She opened Thursday's work session reading from a letter from John Rowe, Chief Executive of Exelon, one of the country's largest utilities.

Calling the bill written by Boxer and Kerry "an excellent starting point," Rowe wrote, "We urge you as chairman, as well as your colleagues, to take the steps necessary to order the bill reported by the committee so that climate legislation can be considered by the full Senate."

Baucus' vote against the bill reflected the difficulties ahead in crafting a measure that would attract the 60 votes needed for passage by the Senate.

As an influential moderate Democrat, Baucus laid out changes he would seek, including a weaker carbon-reduction target. Other Midwestern and Southern senators from states heavily reliant on coal will seek their own changes, which could upset liberals now supporting the bill.

Story Copyright (c) 2009 Reuters Limited. All rights reserved.

Can a $1 billion help save the environment? George Soros hopes so.

The billionaire financier and philanthropist plans to invest part of his wealth on clean tech to fight global warming. In a speech at the Project Syndicate editors' forum in Copenhagen, Denmark, on Saturday, Soros gave the keynote address announcing his new plans.

Soros said he will invest $1 billion in clean-energy technologies and will provide $100 million--$10 million each year for the next 10 years--for the new Climate Policy Initiative, a watchdog-type foundation to promote measures to combat climate change.

"Global warming is a political problem," Soros announced to the meeting of editors in Copenhagen, the same city where representatives from around the world will meet in December to try to hammer out a new climate agreement. "The science is beyond dispute," he added, "but how do we achieve the objectives we all know are necessary? That is a political problem."

The need for cleaner coal has been a critical issue for Soros, who has invested in so-called "clean coal" technologies. In April, he was part of a consortium that funded $50 million toward PowerSpan, a firm researching and developing methods for cleaner coal.

On another front, Soros announced last year that his investment fund would pour $25 million in funds toward Qteros, a company that can make cleaner ethanol from a single microbe.

Soros offered few details on where he plans to invest the $1 billion. But he said he will look for profitable opportunities, and also "insist that the investments make a real contribution to solving the problem of climate change."

Clean energy has been a key issue for Soros. The billionaire has given speeches and interviews promoting development of alternative energy as not just a necessary goal but one that could revive the global economy.

Of course, clean energy has become an increasingly popular sector all around. A recent report on venture capital funding found that more money is being invested in green tech than in software or biotech.

Born in Budapest in 1930, Soros survived both the Nazi and Communist occupations of Hungary. After fleeing to England where he studied economics, he eventually settled in the United States. Soros amassed his huge fortune as the chairman of Soros Fund Management. He was recently ranked by Forbes as the 15th richest American, with an estimated net worth of $13 billion.

One-third of China's carbon emissions come from manufacturing electronics and other goods that are then exported worldwide, according to a July report in the journal Energy Policy.

The findings come from researchers led by Christopher Weber, a professor of civil and environmental engineering at Carnegie Mellon University.

Researchers measured 1.7 billion metric tons of carbon dioxide resulting from China's exporting industries in 2005. That rose from 760 million tons in 2002 and from 230 million tons in 1987, based on an analysis of economic and emissions reports from China.

In that time, carbon emissions from making electronics for export rose from 13 percent to 22 percent, according to a New Scientist report about the study.

China's contribution to climate change has been in the spotlight this summer for its attempts to clean up pollution in Beijing before next month's Olympic Games.

In June, the Netherlands Environmental Assessment Agency found that China beat the United States in 2007 for the first time as the world's largest emitter of carbon dioxide. Reports often blame China's booming economic growth and reliance on coal-fired power plants for its increased emissions.

However, the Chinese government has argued that nations importing its products are also responsible for global warming that may result from manufacturing the goods.

In his speech in Constitution Hall this week, former Vice President and renewable energy investor Al Gore extolled a stretch goal challenging America to achieve 100% renewable power within 10 years.

The quote: "Today I challenge our nation to commit to producing 100 percent of our electricity from renewable energy and truly clean carbon-free sources within 10 years." And my favorite part: "When President John F. Kennedy challenged our nation to land a man on the moon and bring him back safely in 10 years, many people doubted we could accomplish that goal. But 8 years and 2 months later, Neil Armstrong and Buzz Aldrin walked on the surface of the moon."

That statement is about like challenging your 2 year old to finish college by the time she is 12. Not exactly practical, more than a little crazy, and likely to be either ignored, or if you push it, to cause lots of therapy sessions by the time she is 8. I will, however, credit him with getting almost every renewable energy platitude I've ever heard into one succinct speech.

He does raise lots of good points about the need for a new energy policy not built around shipping dollars to the MidEast for oil (a definite must), for long term support for renewables (it is critical for us to get off our fits and starts mish mash idea of renewable energy policy), and for moving faster and larger to fight climate change (a topic near and dear to my heart, and one that is only partially helped by making broad statements about how fast the sky is falling, I mean, the glaciers are melting). In fact, there is no better way to give anti renewable energy and climate change naysayers fuel and ammunition than to make statements like these. Any path we go down, I'd still rather challenge that two year old to do something they can achieve, not try and make it through college by age 12 - especially if I'm asking her to pay for it. Slow and steady wins the race.

The core of Al Gore's argument in his speech on the practicality of a 10 year all renewable energy goal boils down to this quote from his speech on fuels:

"What if we could use fuels that are not expensive, don't cause pollution and are abundantly available right here at home?

We have such fuels. Scientists have confirmed that enough solar energy falls on the surface of the earth every 40 minutes to meet 100 percent of the entire world's energy needs for a full year. Tapping just a small portion of this solar energy could provide all of the electricity America uses.

And enough wind power blows through the Midwest corridor every day to also meet 100 percent of US electricity demand. Geothermal energy, similarly, is capable of providing enormous supplies of electricity for America."

And this one on costs and technology:

"To those who argue that we do not yet have the technology to accomplish these results with renewable energy: I ask them to come with me to meet the entrepreneurs who will drive this revolution. I've seen what they are doing and I have no doubt that we can meet this challenge.

To those who say the costs are still too high: I ask them to consider whether the costs of oil and coal will ever stop increasing if we keep relying on quickly depleting energy sources to feed a rapidly growing demand all around the world. When demand for oil and coal increases, their price goes up. When demand for solar cells increases, the price often comes down."

These quotations, while partially true and very seductive, are highly misleading in this context. The effective conversion rates of that energy to usable electric power or liquid fuel is still horrendously low, and requires lots and lots of capital expenditures, and thousands of miles of new transmission lines to implement. And that's not taking into account the state of technology - as an industry we really are the two year old in my analogy.

So given those conversion rates and the current high capital expenditures per unit of energy, the cost is still 5-20x (depending on what you count) the cost of conventional electric power generation (yes I know, unless you add in the carbon price and environmental externalities, but that's still extra cost any way you slice it . . . unless you'd like to subsidize mine). Frankly no serious analyst is suggesting that within 10 years, given the state of technology and the best case forecast capacity, that solar can make up more than a small single digit fraction of even electricity needs or that wind can make up more than a meaningful minority share (let alone after doubling the global power demand by replacing liquid fuels in cars with electricity, which Al Gore also suggests), especially given lead times on power plants and transmission lines.

Most likely even if the technologies were already cost comparative, which they are not - if you need evidence, just look at our wind and solar industries in their current tizzy because their biggest subsidy programs are up for renewal this year - most analysts wouldn't project a fabled grid parity on cost for renewables for at least the next decade, and certainly not at scale. So Mr. Gore's statements on cost and technology are in part true, but imply a maturity level in these industries that just doesn't exist yet. Given manufacturing scale up issues on the technology, transmission infrastructure requirements at least as large as the new generation requirements, and long lead times on building projects of this size (industry executives point to seven year time frames just to build a single transmission line), probably reaching even significant low double digit percentages of carbon free power within ten years is a stretch (excluding large hydro and nuclear which we already have but are hesitating to expand) across the whole nation. Notwithstanding that California has managed to come close to its target 20% number over the last decade, that's one state leaning on the resources of many states, using the best available sites, federal subsidies paid for from all of our pockets, and that took a decade. When it comes to carbon capture and storage for coal fired generation, a concept with lots of legs - if it works - 10 years just isn't enough time to achieve scale. The first big pilots are scheduled over the next several years, and there are too many unknowns to bet the farm on, without the lead time and capital cost issue. Though still definitely worth trying.

And as far as paying for it, there was an article in the San Francisco Chronicle today calculating our Federal government long term liabilities at $450,000 per American already mainly for Medicare and Social Security. Actually trying to replace our entire fossil fuel infrastructure within 10 years would push that to how much? Somebody please do the math before we launch a government funded mission to the moon, or legislate that our citizens pay for it instead. On costs, Mr. Gore made the statement in his speech "Our families cannot stand 10 more years of gas price increases." I agree, but Mr. Gore, your 10 year, hell for leather, man to moon race for 100% renewable energy would guarantee just that.

So while extolling stretch goals for a two year old is probably a good idea, let's keep it within the realm of possibility, and not just make grandiose statements for media effect. Now if Al Gore's silly challenge on renewable energy was simply a trojan horse to get people talking about how to move forward on fighting climate change and addressing our long standing energy policy issues, I'm all for that and am happy to help. After all, the words Al Gore and climate change make for very searchble blog articles! But personally when I make outlandish statements, I do like to bring an modicum of practicality to the discussion.

I will leave you with one final note, and please remember, I am actually a proponent of the ideals in Al Gore's speech, I just prefer to get there in one piece. One theory on the effect of the history of the man on the moon driven space race that Mr. Gore challenges us to copy basically says that we pushed for a single high profile goal so fast and furious that we effectively skipped ahead and outran our infrastructure and capabilities to get a nonscalable shot at the moon in the target time frame. The theory goes on to suggest that's why after reaching the moon so fast we haven't progressed at the same rate in space since, and had we taken it slower, we would have gotten there a few years behind, but might be on Mars by know. Akin in a military campaign to outrunning your supply chain, and then getting your army surrounded and destroyed - or perhaps invading a country half way around the world, winning the war in weeks and forgetting to prepare for the peace. And just to show that I can deliver as many platitudes in one article as Mr. Gore, that's why you never get involved in a land war in Asia.

Energy and environment are the two pillars of everything in our lives. Mr. Gore and I want the same thing, but he thinks we can't afford not to swing for the fences - I think we can't afford to mess it up.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is the founding CEO of Carbonflow, founding contributor of Cleantech Blog, Chairman of Cleantech.org, and a blogger for CNET's Green Tech blog.

Green building materials - I'm not sure it would be my thing, but investors across the board seem to think this area is ripe for a hit.

Carbon IT - With some sort of cap and trade a near certainty, the interest is picking up in one of the few areas in carbon that looks like a "venture bet". I should know, I have one of these companies myself.

Food related technologies - High food prices and rising fertilizer costs, what can I say?

N-generation solar technologies - Everyone not in the first wave is looking to get in to the 4th wave. Not sure venture investors will fare better in the 3rd or 4th wave than they did in the second, but they are going to try.

I had a chance to visit one of the Gaia Hotels, which bills itself as a new eco-hotel chain, this weekend. The experience put those four contending areas in a bit of a new light, as the creator of the Gaia ecotel concept toured me around and shed some light on the decisions that went into them from the demand side. (Note: "ecotel", "bit of a new light", "shed some light", "demand side", all good cleantechisms).

After launching a LEED Gold Certified facility in Napa Valley a little under two years ago, Gaia opened a new one in Northern California, focused on outdoor recreational travelers, which they expect to achieve at least LEED Silver. I had lunch with Wen Chang, the creator behind Gaia, this Saturday. When it came to green building materials, I was frankly amazed how much impact the LEED program had on the design and materials selection, and how big a selling point LEED was to this concept. Everything from using photovoltaic panels and Solatube daylighting, to low flow shower heads, low water usage and local landscape selection, and chemical free gardening and stormwater management, all the way to the carpet made from recycled materials, CFLs in the night stand, and sustainable forest products. Talk about demand stimulus, after an extensive tour, I was ready to buy a green building materials company myself. Especially since the ecotel was booked solid!

And of course front and center in the lobby, there were Renewable Energy Credits (though not carbon credits) purchased from our friends at Renewable Choice Energy, to offset the power usage, and a monitoring system to show power and water usage, and solar production.

Moving on to the food technology, the Gaia Anderson restaurant is not yet open, but is intended to be an organic and locally grown food (I assume that Napa will count as "local" for the wine, but I did not ask!).

No eco friendly building in this day and age would be complete without a solar panel on the roof. Gaia Napa's solar system is apparently providing 10% of the electricity needs on site, while at the Gaia Anderson, the panels have not yet arrived. But perhaps the most telling for would-be solar barons, Wen Chang did not know or care whose technology powered the solar panels. Only that they arrived and worked.

All in all, quite an eye opening one day "deep dive" into the demand side of the four top contenders for cleantech's next big thing. (Pardon the expression deep dive, I've always found that term amusing, especially since cleantech VCs use it all the time now to describe the 6 conferences they went to and 12 business plans they read to become an expert in, say, solar, so I couldn't resist.)

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is the founding CEO of Carbonflow, founding contributor of Cleantech Blog, a Contributing Editor to Alt Energy Stocks, Chairman of Cleantech.org, and a blogger for CNET's Greentech blog.

I had a lively discussion with Susan Wood, CEO of SCC Americas, at the Carbon Finance North America Conference last week. SCC Americas is the U.S. arm of Syndicatum Carbon Capital, one of the largest developers of Kyoto-based CDM carbon credit projects in the world. Susan herself has been doing emissions trading for more than a decade, after starting out as an environmental engineer.

The punchline in our chat was quite fascinating--the U.S. voluntary carbon market does not reward complexity in projects, Susan says. Basically, U.S. carbon credit developers are only doing a few limited types of projects, like methane destruction. Why? Because the buyers, who dictate the voluntary markets, tend to be scared off by anything complex that they do not understand, or anything that does not appear to be future proofed against coming U.S. regulations. This stands in stark contrast to the CDM market, where complexity is often the hallmark of the major developers since the methodology and standards process is trusted to a much greater degree by compliance buyers than the voluntary standards are.

One other way to look at this issue is that much of the innovation in new ways to abate carbon is coming from CDM under Kyoto, not the voluntary markets. A bit sad, and a challenge to the voluntary standards community to get its act in order. Possibly the rise of new standards like Voluntary Carbon Standard and Green-e Climate will help fix the crisis in complexity, but we have been saying that for a while. As Susan puts it, we need it to happen yesterday.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and start-ups in clean tech. He is also the founder of Carbonflow, a provider of software solutions for the carbon markets.

As arguably the largest single market segment in the clean-tech sector, carbon markets are an area of keen interest for me personally and professionally, so it is always frustrating that the mainstream media largely refuses to learn the details.

In general, layman and media who don't understand the details of the carbon markets attack carbon offsets in two areas: first, questioning whether the credits are for a project that would have occurred anyway (a concept known in carbon as "additionality"); and second, questioning whether there are checks and balances to ensure the environmental standards are adhered to and the abatement actually happens (in carbon known as the validation and verification processes).

The frustrating part for anyone in the industry is that the entire of the carbon credit process set up under Kyoto is all about ensuring the answers to those two questions. Leading certification firms and carbon project developers have been dealing with the details behind those questions for years.

The biggest weakness of the carbon offset process to date has been that the high level of oversight and protection, while working, has led to higher costs and fewer projects getting done, rather than too many. Bottom line, the carbon markets are working, and are pouring billions of dollars into fighting global warming, just like the NOx and SOx trading markets helped reduce air pollution faster and cheaper than anyone expected. Now it's time to figure out how to make them really scale.

I caught up with a friend of mine, Marc Stuart, to give us a little teach-in about the real story in carbon offsets, what matters, what does not, what works, and what still needs to be tweaked. Marc should know, he's one of the founders of EcoSecurities plc (AIM:ECO.L), one of the first, and still the leader in generating and monetizing carbon credits, whose largest investor is Credit Suisse. Marc, thanks for joining us, we appreciate the time and the teach-in.

Q: Even for those who don't know much about carbon offsets, many people have heard about the concept of additionality, and almost everyone intuitively understands it at some level. But it is devilishly complicated in practice. I've always described it to people as "beyond business as usual." Can you explain additionality and give us some insight into the details?
Stuart: Additionality is the core concept of the project-based emissions market. In a nutshell, it means that a developer cannot receive credits for a project that represents "business as usual" (BAU) practices. A classic and often cited example is that industrial forest companies should not be able to get credits simply for replanting the trees that they harvest from their plantations each year, since that is already part of their business model. A utility changing out a 30-year-old, fully depreciated turbine would not be able to claim the efficiency benefits, though a utility that swapped out something only 5 years old might be able to under certain circumstances.

Additionality is easy to definitively prove in cases where there is zero normal economic reason to make an investment, such as reducing HFC-23 from the refrigeration plants or N2O from fertilizer plants. Such projects easily pass a "financial additionality" test, since it's clear that as a cost without a benefit, they wouldn't have been economically feasible under a BAU scenario. It gets far more complex though, with assets that contribute to both normal economic outputs and the development of carbon credits, in particular in renewables and energy efficiency. Sometimes these projects are profitable without carbon finance, but there may be other barriers preventing their execution that make them additional.

The UN has developed a very structured and rigorous process that projects must undergo to prove additionality. It is essentially a regulatory process with multiple levels of oversight, in which a body called the Executive Board to the UN's Clean Development Mechanism (The CDM is the international system for creating carbon offsets called CERs) ultimately makes a binary decision about whether a project is eligible to participate or not. Anchored in the middle of that oversight is an audit process run by independent, licensed auditors, the largest of which is actually a multinational nonprofit called Det Norske Veritas (DNV). However, many projects don't even make it to that decision point before they are dropped in the process.

One of the benefits of carbon offsets often touted by those who support them is the idea that they provide compliance flexibility and liquidity in the early years of a compliance cap and trade system. What are your thoughts on how that works?
Stuart:The simple reality is that many assets that emit carbon have long lifetimes and that legitimate investment decisions have been taken in the past that rightfully did not take into account the negative impact of carbon emissions. For an easy example, think about somebody who is a couple of years into a six-year auto loan on a gas guzzler--can policy just force that person to immediately switch to a hybrid, especially since the used car market for his guzzler has now completely disappeared? Even if society says yes, how long would it take for the auto industry to ramp up its production of hybrids? Now look at infrastructure--for example, most power plants and heavy industry facilities have lifetimes of thirty years plus. Even if we were economically and politically able to affect a radical changeover, simply put, the physical capacity for building out new technology is limited, even in a highly accelerated scenario. So, like it or not, GHG emissions from the industrial world are going to take quite a while to stabilize and reduce.

The point of offsets is that, in fairly carbon-efficient places like California or Japan, availability of low cost reductions within a cap-and-trade system is quite limited, meaning there is an incentive to look beyond the cap for other, credible, quantifiable, emissions reductions. Reductions in GHGs that are uncapped (either by sector, activity, or geography), such as are found in the CDM, are thus a logical way to achieve real GHG reductions and accelerate dissemination of low-carbon technologies. In effect, the past helps subsidize changeover to the future as buyers of emission rights subsidize other, cheaper, GHG mitigation activities. As caps get more restrictive over time, capital changeover occurs. Offsets allow this to occur in an orderly and cost-effective manner.

There have been a number of studies questioning whether offsets are just "hot air" and whether carbon offset projects actually achieve real emission reductions. What is your response to these accusations?
Stuart: As noted in the first question, the CDM in particular is a market that is completely regulated by an international body of experts supported by extensive bureaucracy to ensure that real emission reductions and sustainable development are occurring. The first and foremost requirement of that body is to rule on whether each individual project is additional. Each project is reviewed by qualified Operational Entity, the Executive Board Registration and Issuance Team, the UNFCCC CDM Secretariat and the CDM Executive Board itself. Plus, there are multiple occasions for external observers to make specific comments, which are given significant weight. So, while there is always the chance something could get through, there are a lot of checks and balances in the system to prevent that.

That said, determining an individual emission baseline for a project--the metric against which emission reductions are measured--is a challenging process. The system adjusts to those challenges by trying to be as conservative as possible. In other words, I would argue that in most CDM projects, there are fewer emission reductions being credited than are actually occurring. It is impossible for a hypothetical baseline to be absolutely exact, but it is eminently possible to be conservative. Is it inconceivable that the opposite occasionally occurs and that more emission reductions are credited to a project than are real? We've never seen it in the more than 117 projects we've registered with the CDM, but I suppose it's possible.

What about the voluntary carbon market in the U.S., where there have been accusations that many projects would have happened anyway? How is this voluntary market different from what EcoSecurities does under the Clean Development Mechanism?
Stuart: The voluntary market has had more of a "wild west" reputation compared to the compliance market. In some ways, that is deserved, but in some ways it is unfair. For a number of years, the voluntary market was the only outlet for project developers in places like the United States and in sectors like avoided deforestation that were not recognized by the CDM. However, because there were virtually no barriers to entry and no functional regulation other than what providers would voluntarily undertake, it was difficult for consumers and companies to differentiate between legitimate providers and charlatans. For EcoSecurities, while the voluntary market has been a very small part of our overall efforts, we always qualified projects according to vetted additionality standards such as the CDM and the California Climate Action Registry, and always used independent accredited auditors. With the emergence of stand-alone systems like the Voluntary Carbon Standard (Editor's note: Marc Stuart sits on the board of the VCS), and the growing demand for offsets from the corporate sector, I believe the "wild west" frontier is drawing to a close. (Editor's note: Other voluntary carbon standards we watch closely include Green-e Climate, put out by the people who certify most of the renewable energy credits (RECs) in the U.S.)

It is also important to note that while the voluntary market has recorded very explosive growth, it is still a very small fraction of the regulatory market, comprising a few tens of millions of dollars of transactions, versus the potential tens of billions of dollars of value embedded in the highly regulated and supervised CDM. The fact that many observers still equate the occasional problems in the fringes of the voluntary market (which are increasingly history) with the real benefits being created in the Kyoto compliance market is a misperception we'd like to correct.

What about these projects we've heard about in China, where the sale of carbon credits generated from HFC-23 capture is far more valuable than production of the refrigerant gas that leads to its creation in the first place? How is this being addressed in the CDM and how can future systems ensure that there are not perverse incentives created like this?
Stuart: HFC-23 projects are the epitome of what is often referred to as "low hanging fruit." In this case, most of the fruit might have actually been sitting on the ground. While there is no doubt in anybody's mind that the market drove the mitigation of HFC-23 globally, the extreme disparity between the costs of reducing those gases and the market value those reductions commanded invariably led to questions whether there were more socially efficient ways to have reduced those emissions. In all likelihood, there were. But to catalyze an overall market like this, it is probably important to get some easy wins at the outset to create broader investment interest and this certainly accomplished that. Moreover, Kyoto created a mechanism for engaging these kinds of activities. It would have sent a much worse signal to the market to have changed the rules in the middle of the game. The CDM has subsequently adjusted the rules to make sure that no one can put new factories in place simply for the purposes of mitigating their emissions. I don't see too many other situations like HFCs in the future, simply because there are no other gases where the disparity of mitigation costs and market value is so severe.

Given that the majority of CDM projects currently under development are located in China and India, how can we ensure that these countries eventually take on the binding targets we will need to reach the scientifically determined reductions in GHGs? Doesn't the CDM simply create an incentive for these countries to avoid binding targets as long as possible?
Stuart: It is clearly in the world's interest to get as much of the global economy into a low carbon trajectory as quickly as possible. However, it is politically unrealistic to expect these countries--whose emissions per capita are between one fifth and one tenth the per capita of the United States--to make an equivalent commitment at this juncture, particularly considering that they are in the midst of an aggressive development trajectory. The CDM provides a way for ongoing engagement with these countries, developing the basic architecture of a lower carbon economy. And there is no doubt that China's emissions in 2012, 2015 or 2020 will be measurably lower than they otherwise would have been, simply because of the current accomplishments of the CDM. Over time, the use of project based mechanisms will contribute to accelerating the development and dissemination of low carbon technologies, which will make those negotiations for binding caps from all major economies far more tenable.

It is widely believed that to address the climate crisis on the scale necessary to avert dangerous global warming, significant infrastructural and paradigm shifts must occur at an unprecedented scale. Some people are concerned that offsets provide a disincentive for making these shifts, since companies can just offset their emissions instead of making the changes themselves. Is this something you saw under the EU ETS at all, and if so, how can it be addressed in a US system?
Stuart: Virtually all of the macroeconomic analysis that has been done of Phase I of the ETS shows that there were real emission reductions undertaken within the system, despite the fact that many companies were also actively seeking CDM CERs. Clearly the fact that both Kyoto and the EU ETS system place quantifiable limits on the use of CDM and Joint Implementation (JI) credits guarantees that emission reductions will also be made in-country as well, so pure "outsourcing" of emissions compliance is not possible. This also appears to be the model being pursued in most U.S. legislation.

Many have complained that the CDM system is too administratively complex, unpredictable, and that the transaction costs of the system are so significant that they could almost negate any possible benefits. What lessons can be learned about structuring an offset system in a simpler, but still environmentally rigorous way? What steps is the CDM EB taking to address these issues?
Stuart: The CDM treads a very fine line between ensuring environmental integrity of the offsets that it certifies and the need to have some kind of efficient process within an enormous global regulatory enterprise. To date, one has to think that they have gotten it about right, as business has complained about inefficiency and environmentalists have complained about environmental integrity. However, it is becoming increasingly clear that the project by project approval approach is creating logistical challenges as the system graduates from managing dozens, to hundreds, to now, quite literally, thousands of projects in all corners of the world. Ironically, it is the success of the CDM in terms of its very broad uptake by carbon entrepreneurs that is causing problems for the current model.

We believe the benefits of the CDM can be maintained by moving many project types into a more standardized approach, whereby emission reduction coefficients are determined "top-down" by a regulatory body, as opposed to being undertaken individually for every project by project proponents. For example, there are dozens of highly similar wind energy projects in China that all have microscopically different emission baselines. A conservative top down baseline set by the regulator (in this case, the CDM Executive Board) would enable projects to get qualified by the system in an efficient manner with far less bureaucratic overhang. This is how California's Climate Action Reserve deals with project-based reductions and we think that it could work well for many sectors.

Is there any difference between a renewable energy certificate (REC) and a carbon offset? Does EcoSecurities support the concept of selling RECs to offset carbon emissions?
Stuart: While renewable energy clearly helps lower the carbon intensity of the electrical grid, there are a great number of other incentives for development of renewables in the U.S., including significant Production Tax Credits, and in most states, RECs or Green Tags. For EcoSecurities, this makes it extremely problematic to claim that these assets are additional, despite their obvious benefits to the global environment and decarbonization of the economy. Acknowledging this, EcoSecurities--along with many other companies--has steered clear of developing REC projects for VERs in the voluntary market. There are other firms that have chosen other approaches, which again highlights the need for standardized approaches like the VCS. That said, we are very active in helping create carbon value for RE projects throughout the developing world via the CDM, where incentives such as RECs are almost universally nonexistent.

There has been a lot of concern about "carbon market millionaires" profiting from selling offsets, and that the only "greening" going on is in the lining of peoples' pockets. As a carbon market millionaire yourself, what do you think about this concern?
Stuart: Capital markets exist to reward innovation and punish underperformance. EcoSecurities has existed for more than 11 years and the founders--of which I am one--have devoted more than 15 years to building up various aspects of the carbon market. For many of those years, as we watched friends and colleagues flourish in other markets like Internet and biotech, our decision to stay in this seemed fairly quixotic. But we understood enough of the science of climate change to recognize that a fundamental policy response had to be forthcoming, or we would be heading to a global catastrophe. Now those policies have come into focus and the overriding recognition is that society will need to mobilize trillions of dollars of capital to decarbonize the global economy. As part of the proverbial "bleeding edge" for many years, we were ironically well positioned to take advantage when early movers in the capital markets recognized the capabilities and brand that we had built up over a decade. As for whether that is the only greening--well, I can tell you that given the very conservative and difficult aspects of qualifying projects for the CDM, I am 100 percent certain that our activities contribute solidly to that decarbonization trajectory and that real emission reductions have occurred all over the world because of our efforts.

What lessons have you learned personally about the market as a co-founder of the leading CDM project developer in the world? You must have some interesting lessons learned for the U.S. as you are probably unique amongst your competitors in having been based here in the U.S. for over 10 years.

Stuart: Thanks for the compliment but actually, I'm not that unique. I started in the market in the early 1990's when the U.S. was the epicenter of a future carbon trading regime, and Europe and Japan looked at it with suspicion and distaste. Quite a number of us from that era did not give up, but instead spent a fair bit of time since then getting our U.S. passports stamped regularly to search the world for projects. It's nice to see that we may finally be getting back to where we thought we would be a decade ago--with the U.S. as a driving force for innovation in decarbonizing the world's economy (coincidentally in a recent report produced by the UNFCCC, the U.S. along with Germany, the UK and France provided over 70 percent of the clean technology currently being utilized in CDM projects). The U.S. is in a perfect position to learn from the both the successes and mistakes within the first Kyoto iteration and I am looking forward to being part of that next stage as well.

What do you say to popular press who don't seem to believe that Kyoto works?
Stuart: Honestly, you haven't seen what I have seen. I've traveled all over the world and seen the results of Kyoto, where "carbon entrepreneurs"--ranging from divisions within multinationals to garage inventors on their own--are seeking ways to cost-effectively reduce GHG emissions. That simply would not have happened without the market signal that Kyoto created. The fact that the CDM has registered more than 1,000 projects and has a backlog of several times that--despite the incredible bureaucratic requirements--shows an uptake several magnitudes beyond what anybody predicted when Kyoto was negotiated. When the managing director of a West African oil refinery is proudly detailing to you the steps he'll be ordering his engineers to take to help save some 250,000 tons of CO2 emissions to the atmosphere, that's when you realize that you've tapped into something significant. And having had the same basic conversation in Mumbai, Jakarta, Sao Paulo, and Beijing, you realize that people really want to do something, but that you need a little push from a market. That said, we are still in the first tentative moments of what is probably a century long issue and there are doubtless many improvements that can and will be made. But we have undoubtedly proven that the basic premise works.

Thanks Marc. A pleasure to chat as always. Keep up the good fight.