Carbon Offset Market Heats Up By 3Degrees

Greentech Media
October 10, 2007

by: Jennifer Kho

http://www.greentechmedia.com/articles/carbon-offset-market-heats-up-by-3degrees-178.html

3Degrees, a San Francisco company that sells carbon offsets, officially launched Wednesday.

The spinoff from renewable-energy firm 3 Phases Energy Services sells offsets it calls "verified emission reductions" to companies that want to reduce their carbon footprints. It also sells renewable-energy certificates and helps manage and market utilities' energy-efficiency programs.

The company isn't the only one selling carbon offsets in the United States, of course.

Charlotte, Vt.,-based Native Energy, which sells carbon-offset certificates to customers such as The Coca-Cola Co., Levi Strauss & Co. and The Timberland Co., raised its first institutional financing from FreshTracks Capital and Village Ventures, according to a Dow Jones story Tuesday.

And TerraPass in San Francisco also sells offsets, focusing more on residential customers.

In each of these cases, the idea is to help customers bring their net carbon-dioxide emissions to zero by "offsetting" their emissions with projects that reduce carbon by the same amount.

While industry insiders think carbon trading could become a huge business in the United States if mandatory carbon caps are set, that could be years away.

So the business is currently driven by companies and individuals who voluntarily pay to offset their emissions. And industry insiders are looking to the voluntary market for early hints about what is coming.

But critics have compared carbon offsets to the Roman Catholic Church's sale of indulgences for worshippers' sins, saying they might not actually work to reduce overall carbon emissions.

3Degrees hopes to combat such skepticism by only buying offsets from projects that meet certification requirements of Kyoto Protocol's Clean Development Mechanism, the Gold Standard or the Voluntary Carbon Standard and that can demonstrate that the income from selling the carbon reductions plays a significant role in the financial viability of the projects.

Priced at a Premium

3Degrees' reductions cost between $6 and $15 per metric ton, more than the carbon credits currently trading at less than $3 per ton on the Chicago Climate Exchange.

But Steve McDougal, 3Degrees' executive vice president of marketing and business development, says customers such as Starbucks, IBM, Wells Fargo, Coldwater Creek, Philips Semiconductor and Adobe think the company's accountability makes the premium worth it.

Still, the road ahead could be bumpy. Peter Fusaro, chairman of environmental consultant Global Change Associates, said 3Degrees is entering a "crowded field, with Terrapass and others already established."

He also wonders if they will have access to the best projects.

"Will there be enough low-hanging fruit for them, as many projects have been picked over?" he said, adding that people now want higher prices for their credits in anticipation of coming mandatory markets.

McDougal said plenty of projects are vying for 3Degrees' attention. The company sends company representatives to each project site before agreeing to buy offsets.

"It they don't meet our standards, we don't take them," he said. "We think it's very important that sellers of carbon reductions projects are transparent and only offer projects that meet these high certification standards."

Finding the Right Projects

McDougal said the company rejected a project last week that definitely accomplished the goal of reducing carbon, but that didn't appear to rely mainly on carbon financing to be successful.

3Degrees already has bought offsets from wind projects, coal-mine methane projects, agricultural methane projects and projects that preserve old-growth forests, McDougal said.

Aside from wind, those types of projects might not be the usual ones the industry expects to see.

But while anaerobic digestion, the process of converting manure into natural gas, as well as technologies that capture methane emissions from abandoned coal-mines and use them for electricity, might not sound (or smell) particularly sexy, McDougal said they can reduce carbon emissions.

They also often are projects that would not make enough money on their own, without selling carbon offsets, McDougal said.

The company hasn't made deals with any solar projects so far, McDougal said.

"We are very big fans of solar; the challenge is the economics often don't meet corporate needs for investments because of [solar power's] high cost," he said.

Still, McDougal said he expects many more technologies will end up benefiting from carbon trading in the future.

Strategizing for a Mandatory Market

The company believes its work in the voluntary market will give it an edge when the U.S. puts a mandatory cap-and-trade system in place. McDougal said he expects that to happen within two to four years.

But while many industry insiders believe a mandatory carbon program is coming - Sen. Barack Obama, a Democratic presidential hopeful, this week proposed a mandatory cap, along with an auction system so companies can trade carbon credits - the timing of such a program is unclear.

Fusaro said that while a California program and the Regional Greenhouse Gas Initiative are scheduled to take effect by 2010, a federal program isn't likely to be decided until 2010 - and will probably take at least another five years to implement.

And while voluntary carbon-credit providers expect the credits will appreciate in value over time, it is still unclear how much value these voluntary credits will have, he said.

"It is still problematic whether any voluntary credits will be allowed under any U.S. mandatory program in California, [the Regional Greenhouse Gas Initiative], or at the federal level," he said. "The latest thinking is that there will be some partial credit allowed in a compliance-driven market."

Still, even if a mandatory market does take longer than expected to materialize, McDougal said 3Degrees is expecting "great things to happen" in the voluntary market.

The company has grown revenues from roughly $6 million as a division of 3 Phases in 2006 to an expected $20 million this year and hopes to double revenues again in 2008, he said.