TerraPass Business Model

I don't have any inside information on TerraPass, the company made famous by providing the $399.75 certificates that offset all your emissions for a year.  I do know that the numbers don't seem to add up, as I wrote here and Protein Wisdom similarly wrote here.

However, I thought about their business model some (since I have been on a role with new business models) and it strikes me that it is brilliant.  Because I am almost positive that they are (legally) reselling the same carbon credits at least three times!

Think of TerraPass not as a company that hands out little certificates, but as a business who makes money through energy projects.  These projects generate electricity without producing CO2 (e.g. wind), or in the case of their cow-poop projects they generate electricity by converting a very bad greenhouse gas (methane) to a less bad one (CO2).

So, for each Kw they generate, there is a certain number of tons of greenhouse gas emissions avoided vs. if they had generated the same Kilowatts with fossil fuels.  (How many tons depends on what fuel you assume the power would have been made with -- my guess is they assume coal, since that gives them the biggest offset, though in fact the marginal fuel in most areas is natural gas in peaking turbines, which produces a lot less CO2).

Anyway, they can claim some number of tons of avoided CO2.  But I am pretty sure they are reselling these abated tons at least three times!  Here is how I think it works:

  1. Their energy projects produce electricity, which they sell to consumers.  Since the
    electricity is often expensive, they sell it as "CO2-free"
    electricity.  This is possible in some sates -- for example in Texas, where Whole Foods made headlines by buying only CO2-free power.  So the carbon offset is in the bundle that they sell to
    electricity customers.  That is sale number one. 
  2. The company most assuredly seeks out and gets
    government subsidies.  These subsidies are based on the power being
    "CO2-free".  This is sale number two, in exchange for subsidies. 
  3. They still have to finance the initial construction of the plant, though.  Regular heartless
    investors require a, you know, return on capital.  So Terrapass
    finances their projects in part by selling these little certificates that you
    saw at the Oscars.  This is a way of financing their plants from people
    to whom they don't have to pay dividends or interest "”just the feel-good
    sense of abatement.  This is the third sale of the carbon credits.

All, by the way, entirely legal, though perhaps not wholly ethical if you really care about reducing CO2 emissions and not just being able to cover your ass to smugly deflect criticism.  This is actually a brilliant way to finance electricity projects, one that Enron wasn't even smart enough to dream up.

And there is nothing wrong with buying these certificates.  The International Star Registry has sold thousands (millions?) of people on the idea that they can have a star named after themselves.  Of course, no actual official body that names stars accepts these as real names, but that's OK, the certificate kind of makes a cool graduation gift (friends of ours did the ISF thing for my father-in-law after he died and my wife really liked it).

Postscript:  By the way, this ignores the ability of such a company to resell the same credits to multiple certificate holders, since the whole CO2 credit thing is pretty damn hard to audit and no one is even trying.  I don't think these guys are doing so, but someone will think of it.

  • Tom

    Hi there:

    TerraPass only sells once and then simply retires the credits. We are third party audited to show that we bought both the correct amount, and retired them. We publish that report on our site.

    As for the other "chances":

    1) We don't get involved in the sale of electricity, but we do make an agreement that the wind farm selling those electrons can make no claim to the "green" attributes of the electricity.

    2) No government subsidies. We pay taxes, in fact.

    3) We don't finance projects

    We're very confident that you are buying real, measured acheived and additional reductions. Thats why 40,000 consumers trust us to help them take action on this issue.

  • Don Lloyd

    Warren,

    "...(since I have been on a [role] with new business models)..."

    Evolution has not prepared us for typing text into a computer. It seems that the first sample that the brain comes across of a word that sounds right is the one that ends up on the screen.

    Regards, Don

  • Phil R

    I usually really like what you have to say, but I'm getting a weird vibe about your reaction to TerraPass. It sounds like you're hunting for a reason to dislike them.

    Either anthropogenic global warming caused by CO2 (AGWCO2) is a problem or it isn't.

    If AGWCO2 isn't a problem, then your criticism is best addressed at those claiming that it is a problem. TerraPass is in that case selling a product that some people like but don't actually need and probably doesn't work: the environmental equivalent of Doc Friendly's Liver Tonic or some such. The Doc Friendly company doesn't have to be watering the product down for it to be a dumb idea.

    If it is a problem, then the responsible, moral thing to do as an individual is to take steps to mitigate the pollution one causes, despite the fact that the government isn't forcing you to do so. It's the same reason you don't litter in a park or leave your garbage on your neighbor's yard, even if there's nobody there to put you in jail for doing it. Buying carbon credits allows one to make good use of division of labor in a capitalist economy by paying someone else to reduce emissions more cheaply than one could one's self, as judged by one's own subjective preferences.

    You perceive a lot of people as wanting to buy offsets for smug, trendy, self-aggrandizing reasons. That may be a valid criticism, I don't know. The point remains that, if AGWCO2 /is/ a problem, then the "smug jerk" crowd is doing the right thing, even if it's for the "wrong" reason. It's pretty analogous to giving to charity. Some people do it to make a big show, but it's still the right thing to do. (And frankly, I'd rather people spend money on carbon credits than on subsidized hybrid cars. That way at least my market for cars is ever so slightly less distorted.)

  • eddie

    I think the most you can ding them for is selling the same carbon reductions twice, and even that's arguable.

    Sale Number One in your list (selling clean energy directly to consumers) should, and apparantly does, disqualify any further sales of the carbon offsets from that electricity. Green-e.org is one of the third-party certifiers used by TerraPass and other carbon offset retailers like CarbonFund.org, and their certification standards explicitly say the following: Eligible RECs (TRCs) or renewable energy can be used once and only once; making a claim (e.g. "we're buying wind power") is one example of a 'use' that results in retirement. See http://www.green-e.org/getcert_re_stan.shtml for a summary or http://www.green-e.org/docs/Green-e_National_Standard.v1.pdf for the full shebang.

    Sale Number Two in your list - government subsidies - undoubtedly happens. Contra Tom Arnold's comment above, even though TerraPass isn't getting any subsidies, the clean power producers that they buy their offsets from are (presumably - I haven't checked to see if the specific vendors they buy from are actually getting government subsidies, but if you really want to check they are listed at http://www.terrapass.com/projects/tour.wind.html as Garwin McNeilus, Solano High Winds, and Ainsworth Wind). I think you could argue equally well that this is a "second sale" or that it's just a plain old subsidy. After all, we don't usually say that dairy farmers are selling the same gallon of milk twice just because they're getting government price supports. But that's really just a semantic argument; whatever you call it, the effect is clear - distortions in the markets for both power and carbon reductions, ultimately making the TerraPasses (and other such offsets) underpriced. Those subsidies should be ditched. For that matter, so should the milk price supports.

    Sale Number Three in your list is just the normal sale of offsets to consumers. You compare it mockingly to for-profit venture capital, but I don't think the scorn is justified. People routinely voluntarily contribute funds for projects they think are worthwhile without expecting any monetary return (the Bill and Melinda Gates Foundation springs to mind). In an anarcho-capitalist society, that's exactly the way that public goods would be provisioned; that's the model we should be supporting and promoting as opposed to taxes and bureaucratic decisionmaking.

    The comparison to the International Star Registry really is offbase. The ISR doesn't sell what they lead people to believe they do, since as you say no actual naming body accepts their names. But when you buy a TerraPass (or an offset from some other similar organization) you actually have reduced the amount of carbon emitted, which is exactly what they are selling.

    By the way, this ignores the ability of such a company to resell the same credits to multiple certificate holders, since the whole CO2 credit thing is pretty damn hard to audit and no one is even trying.

    "Hard to audit" appears to be correct. See http://green.itweek.co.uk/2006/10/firms_urged_to_.html for a summary of a Guardian article describing some of the issues. "No one is even trying" is flat wrong, however. A quick googling shows: "The Climate Group is currently working on an international set of voluntary standards", The CarbonNeutral Company has developed a protocol that includes independent auditing ( http://www.carbonneutral.com/uploadedfiles/Quality%20assurance%20standards%20for%20carbon%20offset%20programmes%20with%20The%20CarbonNeutral%20Company.pdf ), Environmental Resources Trust and Green-e are both in the business of auditing, verifying, and certifying emissions reductions, and the UK is developing (or has developed?) a carbon audit regime. This is all good to see. Third-party certification by multiple competing and cooperating private certification bodies is what we anarcho-capitalists have wanted to replace the FDA and the SEC and their ilk for a long time.

  • Mike Hunt

    The Terrepass site states about a third of the coupon revenue goes to buying some sort of green credit generated when a wind-farm or similar pushes power onto the grid. Thats a decent way of keeping track but it sounds like a second revenue stream for the wind-farm. If thats the case then Terrepass buyers are artificially reducing the cost of green-energy. That sounds nice but since its all going to the same grid the end result will be cheaper coal/gas/whatever based electricity as well, increasing the consumption of that "bad" electricity. It seems their assumptions about a third of the revenue ignore the economic affect free money to wind-farms will have.

    On the other two-thirds where carbon credits are purchased and retired - it is a way of knowingly offestting CO2. However, does it seem silly to anyone else we have people paying for firms to NOT produce anything? Also, the cost of running a firm or generating electricity just increased from fewer CO2 credits available on market because others want to drive big cars? Carbon trading sounds like a good plan for specific industries but when its interfered with from movie-stars and their want of a mansion and limo? It sounds completely destructive to me. If Al-Gore wants to buy C02 credits from a market for cars so someone else is paid not to drive thats fine - but to keep large unnecessary cars on the road by retarding actualy productive capacity? Am I crazy to think thats a really stupid idea?

  • eddie

    Mike: Tyler Cowen discussed the possibility that offsets might lower the cost of dirty power and thus increase its use. See here and here. I commented there that the effect of offsets is to lower the marginal amount of carbon emissions for the marginal unit of economic output, which is a good thing. That happens even if the absolute amount of carbon emissions increases as a result of cheaper energy.

  • ltlf653

    Just want to point out that TerraPass does not guarantee the additionality component that other offset providers to. They buy their offsets throuh the Chicago Climate Exchange--there's no guarantee that the offset-generating projects they are helping to fund even NEED that help. They may have been constructed anyways.

    A (much more reputable) company like NativeEnergy ensures this "additionality" component. Without the offset revenues, projects like a wind farm on tribal lands or a methane digester on a family farm would not happen for lack of capital.

    Go ask TerraPass exactly where your money is going when you buy offsets...and ask for a guarantee that the projects they're allegedly bringing to fruition wouldn't have happened anyways!

  • eddie

    Go ask TerraPass exactly where your money is going when you buy offsets...

    Excellent advice for anyone interested in buying carbon offsets. I asked Google about it, and found this post by TerraPass about additionality. Good reading, and the explanations seemed very well-thought-out to me.

    Not to mention that you can see exactly where TerraPass spends their money here. All in all, they strike me as being thoroughly transparent, diligent, and thoughtful in their approach to what they see as both a problem and an opportunity. Good for them. I'm sure that there are other carbon market players that are better, but probably even more that are much worse.