Green Tech

Would you be willing to pay for home security services if they could also help cut your electricity bills?

In a nutshell, that's what start-up iControl is pitching to consumers with its energy management software and home automation gear. The Palo Alto, Calif.-based company is also working with utilities to get its energy management system installed as part of smart-grid trials.

On Tuesday, it said that its home automation equipment can now use the Zigbee wireless protocol to communicate with two-way smart meters.

Will home energy management enter through home automation networks?

(Credit: iControl Networks)

It's part of the company's plan to enter the field of home energy efficiency, where there are dozens of companies already vying for business. The path it's taking is either through security service companies, utilities, or broadband suppliers, such as cable companies or phone companies, said CEO Paul Dawes.

iControl's technology is software for managing home area networks for home security. It also makes reference designs for Internet gateways and networked thermostats manufactured by third parties. The system allows a person to set up a network of security cameras which can be controlled by a touch-screen device.

With some additional equipment, the system can also be used to monitor energy usage and help homeowners cut energy usage, said Dawes. He expects these services will be offered for free as part of monthly security services, which cost about $30 to $35 per month. Security company ADT said that it plans to use iControl's software system to include services beyond home security, he added.

iControl's energy management system will also work with smart meters installed by utilities. Using a Zigbee-based gateway box and a networked thermostat, the system can get data via the smart meter which can help cut consumers' electricity bill, Dawes said.

For example, the meter can signal when cheaper rates are in effect or when there is a demand-response program in effect. In those cases, appliances on the iControl network can be scheduled to take advantage of those lower rates.

By buying some additional equipment, a consumer could program lighting and heating and cooling using the system, but the company is mainly working through utilities at this point.

"We don't see consumers willing to pay a recurring fee for energy management. They're willing to spend $50 for some energy management solution. What's going to change is when utilities go to time-of-use metering (where there are different prices at different times). Then, the economic incentive is much higher," Dawes said.

iControl is expecting that telecommunications and cable providers will start offering Internet-based home security services and then home energy management. But at this point, it's not clear how those companies will make money in energy management, Dawes said.

Is the best way to manage your energy use through a home security system?

Start-up iControl Networks said Wednesday that it has raised $23 million to further develop its home security system that also allows people to control home energy through the Web and mobile devices, including the iPhone.

Investors in the series C round brought corporate investors ADT Security Services, Cisco, Comcast Interactive Capital, and GE Security. Charles River Ventures, Intel Capital, and Kleiner Perkins Caufield & Byers--through its iPhone application iFund--are also investors. To date, iControl has raised over $45 million.

Will home energy management enter through home-automation networks?

(Credit: iControl Networks)

There are dozens of companies developing home energy monitoring systems, some of which are simply displays while others communicate with smart meters or home-area networks.

iControl's approach is to create a hub, connected to a home broadband connection that has wireless connections to IP cameras and security boards as well as thermostats and lighting. To control energy-related devices, it uses the Z-Wave wireless standard for home automation which can also control doors and locks.

iControl intends to sell its technology through other providers, such as home-security companies and utilities looking to offer networked services to consumers.

"iControl is extending home security and energy management to the broadband Internet and iPhones so consumers can see, protect and manage their homes anytime, anywhere," said John Doerr, a partner at Kleiner Perkins Caufield & Byers.

The famed venture capital firm decided to invest in iControl because it found consumers were willing to pay ongoing fees for security. Energy-efficiency tools are offered as an add-on.

"Consumers will pay hundreds of dollars to put in new technology, they'll pay $30 to $40 a month to secure their peace of mind...we found through this Trojan horse that we can bring in new technology" for energy management, Kleiner Perkins Caufield & Byers partner Ellen Pao told Greentech Media in June.

In the wake of recent reports describing the electric grid's vulnerabilities to hackers, two members of the U.S. Congress have introduced legislation giving federal regulators more authority to combat that possible threat.

The electric grid system that keeps the United States humming is worth more than $1 trillion and keeps the lights on for more than 300 million Americans. Federal regulators have complained they do not have enough authority over the electric grid networks, which recent reports have suggested may be vulnerable to infiltrations by Chinese and Russian spies--a new concern as utilities tie grid-monitoring control systems to open networks like the Internet.

Matching bills were introduced in the House and the Senate on Thursday to increase the authority of the Department of Homeland Security and the Federal Energy Regulatory Commission to secure the electric grid. The bills were introduced by Sen. Joe Lieberman (I-Conn.) and Rep. Bennie Thompson (D-Miss.), who chair the Homeland Security committees in their respective chambers.

"Our cybersystems are under constant attack," Lieberman said in a statement. "We rely on cyberspace for so much of what is at the heart of our way of life, and our systems are not protected. We are focusing on the electricity cyberstructure today because electricity is what so many critical sectors of the economy depend upon."

Utilities are already expected to comply with mandatory cybersecurity standards, but regulators have reported that utilities are likely downplaying the critical nature of their infrastructure to avoid compliance with the rules.

The legislation addresses that by giving FERC, DHS, and other national security agencies the authority to determine which physical or cyber assets should be deemed "critical electric infrastructure." The bill clarifies that "critical" infrastructure should refer to networks that are so vital to the United States that their incapacity would cause significant harm to the country's security, the economy, or public health at a national or regional level.

It also would enable FERC to issue rules or orders to protect critical electric infrastructure against threats--including emergency orders, which could be issued without prior notice if FERC determines an order is needed immediately to protect the grid from an imminent threat. Emergency orders would remain in place for 90 days, unless FERC opened them up to public comment.

In addition, the legislation calls for FERC and the DHS Secretary to establish within 120 days of its enactment interim measures to protect the electric grid.

The DHS would also be responsible for more oversight of grid protection programs. The legislation would require the department to conduct research to determine if the security of critical electric infrastructure has been compromised and to report its findings to Congress. The department would also have to produce regular reports with recommendations for creating a collective domestic response to a cyberattack by a terrorist, nation-state or person.

The legislation comes as the Obama administration is pushing through stimulus spending smart-grid development, which would connect the electric grid to more networks.

Spies from other countries have hacked into the United States' electricity grid, leaving traces of their activity and raising concerns over the security of the U.S. energy infrastructure to cyberattacks.

The Wall Street Journal on Wednesday published a report saying that spies sought ways to navigate and control the power grid as well as the water and sewage infrastructure. It's part of a rising number of intrusions, the article said, quoting former and current national security officials.

The intruders don't appear to have done any damage to date but did leave behind software that could disrupt the system.

"The Chinese have attempted to map our infrastructure, such as the electrical grid," a senior intelligence official told the Journal. "So have the Russians."

There have long been concerns over securing the power grid and other infrastructure. Those security issues are mounting as utilities use more Internet-based communications and software to control the grid through smart-grid technology.

A report by security firm IOActive last month warned that people with $500 worth of equipment and the right training could manipulate smart meters with embedded communications in people's homes to potentially disrupt operation of the grid.

Plans to modernize the grid call for adding communications capability to the distribution network, allowing utilities to get usage data from buildings or equipment along the grid.

That increased automation, however, opens up more security challenges. Smart-grid companies can ship information over the power lines, cell phone networks, or the Internet using proprietary protocols or the Internet Protocol.

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Updated on April 1 at 6:15 a.m. PDT with comments from utilities.

Updated on April 2, 3:05 p.m. PDT to address dispute over Boehner cost estimate.

The first draft of an energy and climate change bill calls for national mandates for renewable energy and energy efficiency but leaves crucial details on carbon regulations open for negotiation.

The House Energy and Commerce Committee on Tuesday released the first draft of the American Clean Energy and Security Act of 2009, (click for PDF) which its backers hope will be voted on this summer. Key figures for the bill in the House are Rep. Henry Waxman, who chairs the Energy and Commerce Committee, and Rep. Edward Markey, who chairs the Energy and Environment subcommittee.

The document was well received by clean-energy advocates on Tuesday but panned by political foes who complained that the global warming portions of the bill will amount to an energy tax on consumers.

According to a summary document (click for PDF), major provisions of the bill are:

• A national renewable electricity mandate where utilities need to get 6 percent of power from solar, wind, biomass, or geothermal sources in 2012 and 25 percent in 2025. One-fifth of the requirement can be met with energy-efficiency measures.

• A demonstration facility for carbon capture and sequestration where carbon dioxide from coal-burning power plants is stored underground.

• Giving authority to the Federal Electricity Regulatory Commission for planning power grid modernization with smart-grid technology and upgrades to the transmission lines.

• A single federal fuel-efficiency standard and low-carbon fuel standard for biofuels.

• An "energy efficiency resource standard" to create incentives for electricity and natural gas companies to invest in customer efficiency programs.

• A global warming reduction program modeled on recommendations from U.S. Climate Action Partnership, a coalition of large corporations advocating regulation. The target is a 20 percent reduction of greenhouse gas emissions below 2005 levels in 2020, 42 percent reduction in 2030, and 83 percent cut in 2050.

• Programs to promote "green jobs," such as training, and rebates for heavily polluting industries that could be put at a competitive disadvantage from costs related to carbon regulations.

The proposals build on the significant energy and efficient-related investments already passed as part of the government stimulus package earlier this year. In general, green technology company executives and investors have said the stimulus plan can help the finance-challenged solar and wind industries in the short term and drive investment in smart-grid technologies and weatherization services.

In reaction to Tuesday's draft bill, environmental groups said that the bill moves the country in the right direction by lessening dependence on imported oil while investing in new green technologies.

"Firm limits on global warming pollution will drive investment to recharge our economy today and enhance our economic stability tomorrow. This discussion draft recognizes that we must act quickly to avoid the worst impacts of climate change and jump-start our economy with clean jobs," said National Resources Defense Council president Frances Beinecke in a statement.

House minority leader, Ohio Republican John Boehner, argued in a statement that the global warming-related portion of the bill will impose as much as $3,100 a year in energy-related costs on households during a recession.

How much and whether carbon regulations will raise electricity prices, is a source of debate. However, the author of a Massachusetts Institute of Technology (MIT) report (click for PDF), which is the source of Boehner's estimate, said that Boehner "misrepresented" the study.

MIT professor John Reilly, who published a study of cap and trade proposals in 2007, on Wednesday sent a letter to Boehner saying that actual number is closer to $340 per household per year, or about ten times less. (Click here for text of entire letter). The Republican party published a release on Thursday defending its cost estimate.

The cost of enacting climate change regulations remains a difficult question both practically and politically. The energy bill draft does not propose a specific mechanism for how a price is fixed to carbon dioxide emissions by heavy polluters. Some observers expect that an energy bill will only be passed this year if climate regulations are separated out.

At least two utilities on Wednesday supported the bill. Lew Hay, CEO of Florida-based FPL Group, a significant investor in wind and solar energy, said in a statement that the bill is a "bold blueprint" to confront "a triple threat of challenges: an economy in recession, an overdependence on foreign energy, and a warming planet."

While touting its actions on energy efficiency, National Grid also applauded the bill for addressing climate change but added that the entire country now needs a "clear framework" to reduce carbon emissions.

For more reaction to the draft bill, see the The New York Times, GreenWire, and Dow Jones.

Deployments of smart grids should be slowed until security vulnerabilities are addressed, according to some cybersecurity experts, citing tests showing that a hacker can cause a major blackout after breaking into a smart-grid system.

The idea behind smart grids, a burgeoning energy sector in which even Google is playing a role, is that automated meters and two-way power consumption data can be used to improve the efficiency and reliability of an electrical system's power distribution. A washing machine in a household hooked up to a smart meter, for instance, could be set up to run only at lower-cost, off-peak hours, and a home sporting solar panels could give power back to the grid.

Through the U.S. economic-stimulus package, the Department of Energy is set to invest $4.5 billion in smart-grid technology. And while many utilities are embracing the initiative by installing smart meters in millions of homes nationwide, security experts and others caution that the technology may not be ready for prime time. According to a CNN report published Friday evening:

Cybersecurity experts said some types of meters can be hacked, as can other points in the smart grid's communications systems. IOActive, a professional security services firm, determined that an attacker with $500 of equipment and materials, and a background in electronics and software engineering, could "take command and control of the (advanced meter infrastructure), allowing for the en masse manipulation of service to homes and businesses."

Experts said that once in the system, a hacker could gain control of thousands, even millions, of meters and shut them off simultaneously. A hacker also might be able to dramatically increase or decrease the demand for power, disrupting the load balance on the local power grid and causing a blackout. These experts said such a localized power outage would cascade to other parts of the grid, expanding the blackout. No one knows how big it could get.

"Industry is working to make meters more secure. They have done a good job," said Joe Weiss, an expert on utility control systems.

Still, experts like Skoudis recommended that smart-grid deployment be slowed until security vulnerabilities are addressed. Otherwise, he said, smart-grid equipment deployed now may have to be replaced later.

"Before we go rushing headstrong into a Smart Grid concept, we have to make sure that we take care of business, in this case cybersecurity," he said.

Industry regulators and industry executives earlier this month echoed concerns to Congress about rapid smart-grid deployments, cautioning that a lack of industry standards for security, reliability, data sharing, and privacy could result in government money wasted on proprietary smart-grid technologies that are not interoperable with each other and that are destined to soon become obsolete.

"I don't think the sky is falling," William Sanders, principal investigator for the National Science Foundation Cyber Trust Center on Trustworthy Cyber Infrastructure for the Power Grid, told CNN. "I don't think we should stop deployment until we have it all worked out. But we have to be vigilant and address security issues in the smart grid early on."

In signing two executive orders on Monday, President Barack Obama made the first moves in a bold multi-pronged strategy to reshape energy policy and spur technology innovation.

At a press conference, the president ordered the Department of Transportation to establish rules by 2011 to raise fuel efficiency to an average of 35 miles per gallon by 2020.

He also ordered the Environmental Protection Agency to immediately review the denial of a waiver that would allow California and other states to set limits on tailpipe emissions.

In Washington, D.C., the moves signal a sharp change in direction from the Bush administration which was the first to block a waiver request from California and did not implement existing legislation that mandated a 40 percent increase in car and light truck fuel economy.

Technology entrepreneurs and investors got the signal, too. If firmer regulations around fuel efficiency take hold, the business for energy-efficient technologies in transportation technology starts to look more attractive.

"Right now, the investment community is thinking that by 2015, if we're lucky, electric vehicles may be one percent of the marketplace--that's not very many," said Bilal Zuberi, an investor at venture-capital firm General Catalyst Partners. "But if that becomes larger and becomes nearer, then that's pretty interesting."

If California adopts stricter greenhouse gas emissions levels, at least 13 other states and the District of Columbia are expected to adopt those mandates. That effectively creates a larger market for fuel-efficient technologies like electric vehicles, efficient transmissions, or lighter vehicle materials.

Zuberi said technology investors typically have a seven- or eight-year window for making a financial return. Knowing that there is demand for fuel-efficient technologies allows investors to invest with more confidence and a better-understood timescale.

The auto technology companies themselves can also develop and validate products faster, he added. Established car companies could also seek to acquire auto start-ups.

Not so fast
Through its industry association, automakers quickly voiced their opposition to granting California its waiver, underscoring the difficulty of establishing tougher environmental standards in an ailing industry.

The Alliance of Automobile Manufacturers issued a statement on Monday calling for a set of national regulations to limit greenhouse gas emissions. It noted that, at the moment, there are effectively three "voices" influencing fuel economy and carbon dioxide emission regulations: the EPA, California, and the National Highway Traffic Safety Administration (NHTSA).

It also urged the administration to have the higher fuel efficiency standards to go into effect for model year 2011 cars "because automakers are working on their product plans now and need the certainty of final standards," according to the statement.

General Catalysts' Zuberi noted that large automakers typically make less money on small, fuel-efficient cars. Changing the mix of their sales to include more fuel-efficient vehicles will force them to innovate on technology or manufacturing, he argued.

Environmental groups, meanwhile, praised the move.

"The cleaner cars he will help put on the road will show us the way to reduce our dangerous dependence on oil and will push automakers to make the cars that the world will want and need in the 21st Century," wrote Dave Hawkins, head of the climate center at the Natural Resources Defense Council.

Other shoes to drop
During Obama's press conference--his first official event in the East Room of the White House--he indicated that the proposed changes in transportation policy are part of broader set of measures his administration is rapidly lining up on energy and environment.

A proposed $825 billion stimulus package includes billions of dollars in tax incentives and direct government spending on clean-energy programs.

In addition to repeating the administration's pledge to doubling the amount of renewable energy in the country in three years, Obama on Monday said that the stimulus plan calls for laying 3,000 miles of new transmission lines--considered crucial for moving wind and solar power to different corners of the country.

The plan also has billions for dedicated to weatherizing two million homes and saving $2 billion a year by making 75 percent of federal buildings more energy efficient.

"Embedded in America's soil, wind, and sun, we have the capacity to change," Obama said. "It will be the policy of my administration to reverse our dependence of foreign oil while creating a new energy economy that will create millions of jobs."

In transportation, plug-in electric or all-electric vehicles do promise to bring a jump in fuel efficiency. All major automakers are preparing some form of electric sedans to be first released in the next two years.

But the policies outlined by Obama on Monday only address a portion of the policies needed to get electric car on the roads en masse, said Brian Wynne, the president of the Electric Drive Transportation Association.

Auto suppliers are not yet prepared to meet a huge spike in demand for electric cars, in particularly the lithium-ion batteries planned for these vehicles.

"There's little doubt this will impact the demand for greener vehicles across the board," said Wynne. "But trying to transition to deployment and a new manufacturing infrastructure for advanced electric vehicles as the auto industry is shedding capacity is a big challenge."

Attempts to bring a global warming bill up for debate were blocked in the Senate on Friday, derailing what would have been the first federal U.S. climate change legislation.

According to published reports, Democrats fell short of the 60 votes necessary to end a Republican-led filibuster.

Debate on the Lieberman-Warner Climate Security Act of 2008 has focused on the cost of throttling carbon dioxide emissions.

"It's a huge tax increase," said Republican Senate leader Mitch McConnell, from the coal state of Kentucky, according to an Associated Press story. Trading carbon emissions allowances, McConnell said, would produce "the largest restructuring of the American economy since the New Deal."

The same article quoted Democratic Senator Barbara Boxer of California accusing the Republicans of spreading misinformation. "There is no tax increase," she said, arguing that consumers would be provided tax relief to help pay energy prices.

President Bush has also warned of carbon regulation costs, and the bill was not expected to be passed into law.

Impact on green tech?
In general, people at clean-tech and energy companies are not counting on a swift introduction of climate change regulations. But most people expect them to take hold within the next five years.

Both presumed presidential candidates--Barack Obama and John McCain--favor climate change legislation.

Climate change regulations are designed to put a price on polluting. For instance, in a cap and trade system that will start for Northeast utilities this fall, large polluters are given carbon emissions allowances that can be bought and sold.

Whether these regulations will benefit green-tech companies and clean energy projects hinges on how the rules are set up.

Until any laws on the books, many technologies are being developed in anticipation of policies to support low-carbon energy technologies and as an alternative to rising fossil fuel prices.

IEA calls for policy-led "energy revolution"
Also on Friday, the International Energy Agency called for a $45 trillion fund to halve carbon emissions by 2050.

In a study, the IEA said that 1,400 nuclear power plants would need to be built and off-shore wind farms expanded rapidly to make this goal.

A "global energy revolution" is necessary to mitigate climate change and to meet rising energy demand around the world, the IEA said. With existing policies, the group said, carbon dioxide emissions will rise 130 percent and oil demand will rise 70 percent by 2050.

"Such growth of oil demand raises major concerns regarding energy supply access and investment needs," Nobuo Tanaka, the IEA's executive director, said in a statement.

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.