Smugness Coupon with Enron Accounting

Apparently one of the reasons all those stars at the Oscars were so pleased with themselves is that they all got a smugness coupon in their gift bags (emphasis added):

Hollywood's wealthy liberals can now avoid any guilt they might feel
for consuming so much non-renewable fossil fuel in their private jets,
their SUVs, and their multiple air-conditioned mansions. This year's
Oscar goodie bag contained gift certificates representing 100,000
pounds of greenhouse gas reductions from TerraPass, which describes
itself as a "carbon offset retailer." The 100,000 pounds "are enough to
balance out an average year in the life of an Academy Award presenter,"
a press release from TerraPass asserts. "For example, 100,000 pounds is
the total amount of carbon dioxide created by 20,000 miles of driving,
40,000 miles on commercial airlines, 20 hours in a private jet and a
large house in Los Angeles
. The greenhouse gas reductions will be
accomplished through TerraPass' [program] of verified wind energy, cow
power [collecting methane from manure] and efficiency projects." Voila,
guilt-free consumption! It reminds us of the era when rich Catholics
paid the church for "dispensations" that would shorten their terms in
Purgatory.

Something smells here, and it is not the cow-poop methane.  This 100,000 pound coupon retails for $399.75 (5x79.95) on the TerraPass web site.  First, this rate implies that all 300 million Americans could offset their CO2 emissions for about $100 billion a year, a ridiculously low figure that would be great news if true. 

Lets look at solar, something I know because I live in Arizona and have looked at it a few times.  Here is the smallest, cheapest installation I can find.  It produces 295 CO2-free Kw-hours in a month if you live in Phoenix, less everywhere else.  That is enough to run one PC 24 hours a day -- and nothing else.  Or, it is enough to run about 10 75-watt light bulbs 12 hours a day -- and nothing else.  In other words, it is way, way, way short of powering up a star's Beverly Hills mansion, not to mention their car and private jet.  It would not run one of the air conditioning units on my house.  And it costs $12,000!  Even with a 20 year life and a 0% discount rate, that still is more than $399.75 a year.  For TerraPass's offset claim to be correct, they have to have a technology that is one and probably two orders of magnitude more efficient than solar in Arizona.

[update:  Al Gore's house 221,000 kwH last year.  Call it 18,400KwH per month, that would require about 62 of these solar installations for $744,000.  I don't think $399.75 is really offsetting it]

So if Al Gore and the Hollywood-ites start whipping out these coupons and claiming to be green, be very, very skeptical.  My guess is that TerraPass is less like a real carbon offset and more like, say, the International Star Registry, where you get a nice certificate for the wall and the internal glow of having a star named after you (which, officially, it really is not).  Both the star registry and TerraPass are selling the exact same thing -- fluff.  Actually, TerraPass's certificate is a bit cheaper than the star registry.  Smugness on sale!  Think of it as the "International Earth Good-Guy Registry."

Update:  This type of thing is incredibly amenable to fraud.  If you sell more than 100% of an investment, eventually the day of reckoning will come when you can't pay everyone their shares (a la the Producers).  But if people are investing in CO2 abatement -- you can sell the same ton over and over and no one will ever know.

Also, this is a brilliant way to finance a power station.  Say you want to build a wind power station.  Actual regular investors will, you know, want a return paid to them on their investment.  But TerraPass has apparently found a way to get capital from people without paying any return.  They just give these people a feel-good share of the lack of CO2 emissions and a little certificate for the wall, and TerraPass gets capital they never have to repay to build a power station they likely would have built anyway that they can then in turn sell the power from and not have to give any of the revenues to investors.  Smart.

More thoughts:  My guess is that TerraPass, when it sells the electricity from these projects to customers, is selling it on the basis that it is earth-friendly and causes no CO2 emissions.  This lack of emissions is likely part of the "bundle" sold to electricity customers.  But note that this would be selling the same lack of emissions twice -- once to TerraPass certificate holders, and once to the electricity customers.  I am sure they are both told they are avoiding X tons of emissions, but it is the same X tons, sold twice (at least).  Even Enron didn't try this. 

I really wish I had fewer scruples, because this would be a fabulous business model -- free capital, the ability to sell the same goods multiple times to different people, all the while getting lauded for saving the world in the press and getting invited to the Academy Awards.

Update #2:  LOL. IowaHawk is offering the same thing, but for the discounted rate of $9.95!  And with much better bumper stickers.  He also suggests a multi-level marketing approach.  Here are just two of many choices:

Bumpersticker1

Bumpersticker2

  • Phil R

    While I don't think you're wrong to be suspicious, presumably part of the point of a carbon credit organization would be to take advantage of division of labor and economies of scale to produce larger per-dollar net carbon reduction than would be possible through isolated individual action.

    Looking at the price of a single-user solar installation and using that to conclude that the project is impossible strikes me as analogous to concluding mass production is impossible because people working alone in cottages producing goods on their own aren't nearly as efficient as mass production claims to be.

    TerraPass (which I'd never heard of until just now) appears to participate in the US pollution cap and trade markets. Just as individual investors can't meaningfully participate in the stock market without a broker, individuals can't meaningfully participate in the pollution cap and trade markets without someone like TerraPass. So, if TerraPass is cheating and not actually offsetting as much carbon as they say they are, I'm sure the other industries who are actually participating in the market will be all over them in a second.

  • http://kurtjohnson.net/blog Kurt

    Terrapass is operating at the attractive end of the cost curve for CO2 - low hanging fruit that in the form of cheap & easy CO2 reductions. The average cost per ton would obviously be much higher if they retired enough carbon for the entire US.

    McKinsey has an interesting cost curve for carbon on page 38 here - solar is not anywhere close to an economic vehicle for CO2 reduction: http://www.usehalf.com/pick/files/page3_blog_entry15_1.pdf

  • Bob Smith

    Just one thing: we don't need to retire carbon in the US. From _Hard Green_: annual CO2 emissions, US, 1.6 petagrams, annual CO2 absorption, US 1.7 petagrams. Yes, that's right, the US is a net CO2 sink, mostly because modern industrial farming (both food and wood) has reduced land use so much that the US's net acres of forested land is increasing. That, and power plants & cars are pretty darn efficient these days. Europe's problem is that they destroyed most of their forest (Britain destroyed all of it).

    Also from _Hard Green_: total world CO2 output from natural sources, 196 billion tons, total world CO2 absorption, 200 billion tons, total human CO2 output, 6 billion tons from industry and 2 billion tons from deforestation. The point here is that human CO2 output is only 4% of the total, and the increase is only 2%. When people are saying "we emit too much CO2", they obviously don't understand just how little we matter. From their polemics you'd think we were emitting 50% or 100% more.

    As an aside, one of the ways environmentalists lie is to use ratios when describing environmental standards. For example, the latest EPA ultra-low-emissions-vehicle standards "reduce emissions by 75% compared to the previous standard". These are for real pollutants, btw, not CO2. That sounds impressive, until you realize you've reduced emissions, compared to a car with no emissions control, from a 99.6% reduction to a 99.9% reduction. You may have noticed how clean LA's air is now, and how acid rain is a bad dream. The 99.6% standard accomplished that. The 99.9% standard is, from an air quality standpoint, masturbation. It keeps the EPA and its lobbyists employed, but that's about it.

  • sack of potatoes

    Bob Smith might be overstating the case, given the recent Princeton-led study that found a significant (but not balancing) impact of carbon sinks on net US carbon emissions; see:

    http://www.princeton.edu/main/news/archive/A98/01/57A00/index.xml

  • eddie

    You're right to be suspicious, but I think if you investigated it more closely you'd find your suspicions unfounded.

    Terrapass and the plethora of other carbon offset marketers are legitimate. They are the consumer-facing portion of the carbon-emissions markets, much like Schwab for the financial markets or McDonalds for the beef markets. They buy carbon offsets in large lots in the market, then turn around and sell them to you in small amounts. They make a profit by pricing the offsets to you at above their cost, like any other retailer.

    Addressing your specific points:

    this rate implies that all 300 million Americans could offset their CO2 emissions for about $100 billion a year, a ridiculously low figure that would be great news if true

    The rate is determined by the market, and that's the current going rate. Kurt's point about low-hanging fruit is probably the explanation.

    For TerraPass's offset claim to be correct, they have to have a technology that is one and probably two orders of magnitude more efficient than solar in Arizona.

    TerraPass doesn't have any technology other than a website, a way to take orders, and a way to trade on the carbon markets. They don't make the carbon offsets themselves. They buy them from the people who do.

    My guess is that TerraPass is less like a real carbon offset and more like, say, the International Star Registry

    They are actually selling carbon offsets, and carbon offsets are actually real.

    This type of thing is incredibly amenable to fraud.

    True. TerraPass claims to be audited and to only deal in carbon offsets that are verified by independent third parties. Third-party auditing is a big deal in the carbon-trading markets - as it should be in any market.

    Also, this is a brilliant way to finance a power station. Say you want to build a wind power station. Actual regular investors will, you know, want a return paid to them on their investment. But TerraPass has apparently found a way to get capital from people without paying any return.

    That's exactly the point, and yes, it is a brilliant way to finance a power station. Clean energy costs more than dirty energy, and clean energy can't compete with dirty energy as a profit-making enterprise if all they are offering is energy. People who want clean energy will have to pay a premium to get it. Retail distribution of carbon offsets is a great way to funnel that premium from the consumer to the producer, since it can be done independently of the actual distribution of the energy itself. It's like a lot of other innovative financial instruments; people have found ways to unbundle (for example) real estate from the risk inherent in owning property, so that the risk and the property can be sold separately to different buyers. In this case, retail sales of carbon offsets unbundles the cleanliness of (for example) wind power from the actual electricity it produces. The electricity is sold to the grid, the cleanliness is sold to the eco-freaks.

    But also note that TerraPass isn't in the business of raising capital for clean power projects, any more than Vanguard is in the business of raising capital for companies in the S&P500. They're both middlemen. The clean power projects raise capital by selling offsets on the market, TerraPass buys them on the market and resells them to hippies.

    It's actually a beautiful example of how capitalism, markets, and economics leads to positive outcomes in an efficient way. Don't tell the hippies that, though - they'll have a stroke. Just let them keep thinking that they're saving the planet without having to worry about those evil markets. (I speak from experience: I learned about TerraPass from a socialist friend who was very proud of using it to become carbon-free. I looked into it, and when I praised him for participating in a market-based solution to environmental issues he blocked his ears and went "na na na I'm not listening!")

    My guess is that TerraPass, when it sells the electricity from these projects to customers, is selling it on the basis that it is earth-friendly and causes no CO2 emissions. This lack of emissions is likely part of the "bundle" sold to electricity customers. But note that this would be selling the same lack of emissions twice -- once to TerraPass certificate holders, and once to the electricity customers. I am sure they are both told they are avoiding X tons of emissions, but it is the same X tons, sold twice (at least).

    This is not the case. The electricity is sold to the grid, which means it is bought at market rates for electricity, without any premiums for being clean. And again, TerraPass isn't in the electricity business - they just buy carbon offsets from people that are (wind farms, mostly).

    IowaHawk is offering the same thing, but for the discounted rate of $9.95!

    That'd be a great deal, if it came with third-party audits that verified that carbon output was actually reduced by the specified amount as a result of the purchase.

    Really, instead of making fun of the carbon offset retail biz, we market-friendly folks should be encouraging it. It beats the tar out of everything else the enviro-fascists would like to do - it's voluntary, it's market-based, and it might actually do some good.

  • http://www.belligerati.net OneEyedMan

    "The electricity is sold to the grid, which means it is bought at market rates for electricity, without any premiums for being clean. And again,"

    I believe this is not correct, at least in many states. First, in many states clean power receives special financing, accelerated depreciation, and even direct support. Second, in several states (NY for example) you can buy your power from clean sources at a very different rate from the prevailing spot rate for power. So in this case, the power could be sold three times, without fraud:

    1) To the state in the form of subsidy for clean power production
    2) To the consumer as clean power
    3) To the carbon market as offset credits

  • eddie

    If the state is subsidizing clean power (which I don't doubt), then it's distorting the market for both power and carbon offsets. The subsidies should be eliminated and entirely replaced by the carbon market. Fat chance of that happening, of course, but we can dream.

    If a clean power supplier can sell directly to the consumer, then anything they sell that way should be ineligible for creating carbon offsets. I don't know if that's how it currently works, but I believe it's supposed to: the various groups that certify and issue carbon credits supposedly only give them out for carbon reductions that would *not* have taken place otherwise.

    So yes, there probably is double- or triple-counting going on. But that could be eliminated (in theory, after we smash the state), and if it were, then carbon markets would be a very libertarian way to address carbon emissions. Even if those flaws aren't ever fixed, a flawed carbon market system (including retail sales to "environmentally-conscious" consumers) is still a better approach than pretty much anything else out there.

  • http://junipernews.typepad.com/titmouse_tails_juniper_ne/ sockrotter

    I'm in northern Arizona and I've been on solar power since late 2000; I sure wish someone would come around and offer a few bucks for my offsets. That would help pay for the battery bank I just replaced @ $1200.
    (My idea for a new business model)
    Rob

  • eddie

    sockrotter: you're probably not eligble for carbon offset credits, since you voluntarily cut your emissions without any additional incentives. Tradeable carbon credits only work if they represent carbon reductions that wouldn't otherwise have taken place anyway. That's why wind farms don't get offset credits for power they market as "clean", only for what they sell to the grid - otherwise Coyote would be right, it would be double-counting.

    That brings in the issue of "baselining". Say I'm a big company and I want to "go green" (maybe as a PR stunt). I have a third party audit my current energy use and set that as a baseline. Now I cut my energy use, thus causing less carbon to be generated. I get to claim the reductions from the baseline as carbon offsets, which I can sell on the carbon market to people like TerraPass.

    In one sense, setting a baseline is completely arbitrary, which seems like this whole carbon trading thing could be a farce. But it's actually economically sound. Setting a baseline creates a property right in the ability to emit a certain amount of carbon (a property right which is created through voluntary agreement rather than by government fiat and which is enforced by contract law rather than criminal or tort law). That newly-created property can then be traded on the market. The question of where to set the baseline is actually irrelevant to that part - setting it *anywhere* will create tradeable property rights. And the Coase theorum suggests that no matter where the baseline is set, the emission credits will be traded on the market until everyone has what they want.

    The catch is that the property (the tradeable credits) only come into existence when a recognized third party creates them, i.e. when someone like Green-e agrees to certify your emission reductions and issue you tradeable credits for them. The setting of the baseline becomes a matter of negotiation between you and them. You obviously want the baseline set as high as possible so that you can get as many credits as possible when you start reducing your emissions.

    The certifier doesn't have a direct interest in whether the baseline is high or low, but they do have an indirect interest in having their credits be seen as credible in the marketplace. Credibility in this case means that the reductions they certify are "real" in some sense, i.e. that the baseline isn't artificially inflated. One component of that is that the baseline has to be based on your current activities at the time you decide to start obtaining credits. Reductions that you've already done in the past don't count.

    In your case specifically, the fact that you previously decided to invest in your own clean power generation and are consuming it all yourself would indicate that you are already "consuming" the carbon-freeness of what you are generating. In short, you're acting like the wind farm does when they market their power as carbon-free, and like them in that case, you won't get tradeable credits for it. On the other hand, if you started selling your solar generated power to the grid, you could get carbon credits for everything you sold that way, and then you could sell the carbon credits on the market. Of course, you'd then have to buy your electricity from the grid as well, so it may not pay off for you. But if you really wanted to, you could probably approach someone like TerraPass and see if they know of any way for small-time clean energy producers to get tradeable credits for selling to the grid. You'd have to go through some kind of certification process, which would probably not be worth the time and effort... but in theory (and maybe even in practice) it would be possible.

  • http://junipernews.typepad.com/titmouse_tails_juniper_ne/ sockrotter

    eddie,
    The part about the business plan was pretty much tongue in cheek; I'm actually about ten miles from the nearest power line. I'm on solar power so I can have a few modern conveniences like midnight satellite internet and a cell phone, electric blower for my heater etc. (It's tough being a hermit these days)
    If Az PS ever builds lines back here, I'm not sure I'd hook up at this point; I kinda like the independence.
    Maybe I could threaten to hook up, then collect offsets for keeping my usage low.
    Rob

  • happyjuggler0

    This doesn't pass the sniff test, but perhaps I am upwind and I am missing something?

    When the US passed regulations on particulate emissions from coal plants during the H W Bush administration, they used a cap and trade system. If you reduced your pollution by more than you had to, you were allowed to sell your "surplus" to other polluters. Thus we reduced overall emissions by the cheapest method practical, by having the cheapest elimination technology be put to use.

    Who got the credits for implementing such techology, the technology supplier or the technology user? The user of course, and we most certainly didn't allow double counting!!!

    We currently have state regulated utilities in effect getting either subsidies for "being green", or being required to directly or indirectly via arm twisting. Thus the utilities that buy wind power or solar or whatever are already crediting this to their "books".

    In my opinion for the technology supplier to also be allowed to count this and sell "carbon offsets" is fraud, pure and simple.

  • happyjuggler0

    If I buy one of those new lightbulbs that use far less electricity than the current "normal" lightbulbs, and I buy it from WalMart thanks to their promotion of it, and they buy it from GE, and GE buys it from China, who gets to sell the carbon offsets from that purchase? Me? WalMart? GE? The Chinese supplier? My utility company? Do I have to wait until I use the bulb to get sell the offset credits, i.e. am I "allowed" to pretend my future usage happens all at once and sell it to someone about to take a plane trip and use the offset all at once?

  • eddie

    juggler: Buying a more efficient lightbulb wouldn't create any offsets. Using the bulb, on the other hand, does - assuming that you start using the bulb after you've had an offset certifier establish your energy use baseline so that using the bulb lowers your energy use from the baseline. You get the credit because you're the one lowering your energy consumption (and thus carbon output) - not Walmart, GE, the manufacturer, or your electric company.

    And yes, you have to wait until you use the bulb to get the credit; in particular, as you continue to use the bulb (and thus continue to use less electricity than your baseline) you'll continue to get new carbon offset credits. Some types of credits are issued based on future carbon reductions, like planting trees - you get the credit when you plant the tree based on the assumption of the total amount of carbon that will be sequestered over the entire lifetime of the tree. That kind of credit-now-for-future-reductions accounting is controversial, and is one of the issues still being worked out in the carbon markets. TerraPass says that all the carbon credits they buy represent reductions of the specified amount of carbon in the same year that the consumer's TerraPass was purchased.

  • algore

    Al Gore's Carbon Footprint(c) is the size of the crater leftover from the meteor that killed the dinosaurs (assuming the Bush administration can't be blamed for their death).