BusinessWeek takes a hard look at carbon offsets and doesn’t like what it sees. The article criticizes offsets from a number of angles, but the one that matters is the charge that offset projects, including some in TerraPass’ portfolio, would have happened even without the sale of offsets.

Additionality — the notion that projects would not have happened if not for the purchase of offsets — is the most important issue we face, both as a company and as an industry. TerraPass customers have to be sure their money is having a positive effect. There is no issue we take more seriously.

Determining additionality is hard, and we’re liable to make mistakes. Not all of the science or the policy is settled. We’re a young company in a young industry with a lot of promise. But, if the industry is to be a part of solving climate change, we must get this right.

Which is why we’re conducting a review of the Tontitown landfill gas flaring project highlighted in the article and suspending purchases until the review is complete. Tontitown has passed two additionality reviews to date — one from the Chicago Climate Exchange and one from us — but the article brings new information to light about local environmental pressures to start the project that may bear on the quality of the carbon offsets from the project.

If that sounds confusing, don’t worry: we’re going to be running this additionality review in the most public, transparent way possible, and if you’re interested in following along, you’ll be an expert on landfill gas flaring projects in no time.

Here’s the plan:

We’re giving ourselves one week to interview all the principals involved in the project.

Waste Management. This is the company that owns the landfill and created the offsets. They claim that the project is strictly voluntary and therefore completely additional.
Arkansas Department of Environmental Quality. This is the state agency claiming Waste Management only undertook the offset project to deal with a groundwater contamination project.

To organize our fact-finding, we will in particular be seeking to apply three additionality tests:

Timing. Is the timing of project compatible with the notion that offsets were the motivating factor?
Financing. Are the project expenditures consistent with the notion that offsets were the motivating factor?
Regulation. Was the project voluntary or compelled by a government agency?

As we gather information, we will present it to the TerraPass community in real time.

Periodic updates (presumably daily) will appear on this blog.
At the same time, we will assemble an official additionality report. We will post all of the interim versions, so that you can watch as it develops.

When the report is ready, we will present to a panel of experts, all of whom are just receiving invitations.

Bill Moomaw, a lead author on the third IPCC report and member of the TerraPass technical advisory board.
Bill Schlesinger, Dean of the Nicholas School of the Environment and Earth Sciences at Duke University and member of the TerraPass technical advisory board.
Two industry experts (to be named shortly) not affiliated with TerraPass in any way.

Based on the recommendation of the experts, we will take one of three courses of action.

Determine that the project is high quality and continue to use it a source of carbon reductions.
Keep the offsets we have already purchased from the project but make no further purchases, on the grounds that we can find more favorable projects.
Replace our entire Tontitown holdings with carbon reductions other projects, on the grounds that they were never additional.

Why go through this rather baroque process? Because we think it will be immensely educational for both ourselves and for our members. These are hard issues, and our way of dealing with hard issues has always been to tackle them head-on, in full view. The Tontitown project has always struck us as a good project, but legitimate questions have been raised, so let’s dig into them together.

Tags: Additionality tests, Stakeholder review, terrapass, Transparency

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Comments

1. Comment by Macey @ Mar 17, 2007 3 PM

Question/suggestion: Why do you guys buy from the Chicago Climate Exchange at all? It seems like that’s a pretty nebulous body of offsets derived from some pretty questionable projects. Why don’t you just work directly with farmers or landfill owners or whatever instead of using this middleman? Seems like a much more legitimate way to go…

2. Comment by Tom Arnold @ Mar 17, 2007 4 PM

Macey:

We do work directly with landfill owners and cow-power project developers. We just agree on a terms, sign a contract, and then register those reductions with the CCX.

The upside of this is that both parties get access to the CCX registry to assure good custody of the credits, once generated.

3. Comment by Trevor @ Mar 18, 2007 4 PM

What about the fact printed in the Businessweek article that RECs are 1-3 dollars a MWh? Are you saying that I’m paying Terrapass $11 a ton for something you only paid 2 bucks for? A 500% mark up is kind of steep for doing something good for the environment.

4. Comment by Scott @ Mar 19, 2007 6 AM

The article says 5 of the 6 projects reviewed didn’t pass additionality criteria. Are you reviewing all of these or just the one that was spelled out for everyone? Are you going to review the projects not even posted on your website? You say you’ve offset 117k tons, but the projects on the site don’t even come close to that.

Also, is your future audit going to account for additionality? This seems like something I’d want to see audited by a third party as well. I don’t care about a guarantee that you paid for it if there’s no guarantee that it isn’t bogus.

I really want to see you guys come out of this. Your work is really important and I want to see these issues solved before I have to see my conservative brother in law at the next family event. I’m going to continue to offset my flights for now, but I need to know for certain that you’re going to address everything and show proof that you did.

5. Comment by Ricky S. @ Mar 19, 2007 6 AM

Can we expect refunds or complete replacements since what we purchased was “vaporware” without additionality, would have happened anyway, and didn’t help the environment the way you promised?

We thought we were purchasing something valuable but we now feel like we’ve been taken.

What did you do with our money?

6. Comment by Adam Stein @ Mar 19, 2007 7 AM

Trevor: Our retail margins are not 500%. RECs are measured in megawatt-hours, not tons of carbon, and the two don’t have a one-to-one relationship. More importantly, at $9/ton, TerraPass is a low-cost provider of offsets, which range all the way up to $40/ton.

Scott: We post every transaction on our web site. We have also already reviewed every project for additionality. Finally, our third-party audit does account for additionality — there are quality criteria built into portfolio requirements. For example, we only buy Green-e certified RECs.

We’re going to be posting a lot more on this topic over the coming week, but we have full confidence in the quality of our portfolio. If the Tontitown review turns up any problems, we may extend the review to other projects. If, on the other hand, the Tontitown review reaffirms the quality of our additionality criteria, then we will not be following up on further unsubstantiated charges.

Ricky: Your purchases did fund reductions in carbon dioxide, and we stand by the quality of our portfolio. Much more on this topic coming over the course of the week.

7. Comment by Aaron A. @ Mar 19, 2007 11 AM

Scott said:
The article says 5 of the 6 projects reviewed didn’t pass additionality criteria.

From what I’m reading, all that BusinessWeek did to test additionality is asking the participants whether the project would have happened with or without TerraPass support. On the surface, that seems logical, but additionality is deeper than that.

I’m also interested in the specific question(s) BusinessWeek asked about additionality. For one thing, did they ask whether the project would have occurred on the same scale without funding? That’s important, you know. I’m fairly certain that TerraPass asks the same question when evaluating projects, and it seems odd that the project managers would have suddenly changed their tune.

— A.

8. Comment by Jo @ Mar 20, 2007 3 PM

It had previously been my impression that TerraPass approached all landfill flaring projects with a high degree of confidence in their additionality because the *only* purpose served by flaring methane from a landfill is to reduce GHG emissions. (That is, only offset purchasers or CCX members would have an interest in funding these projects, therefore they are clearly additional.)

The question raised by the BusinessWeek article that I think is bigger than the quality of any particular project, is the new information that apparently landfill flaring projects are sometimes used to address ground water contamination, and are sometimes mandated by the government. This information would imply that TerraPass will need to apply greater scrutiny to the additionality of *any* future landfill flaring project.

9. Comment by Adam Stein @ Mar 20, 2007 3 PM

Hi Jo,

That is the issue raised by the article, and it’s the main one we are examining. All of our examinations to date, however, are pointing to the conclusion that our initial assumption was valid. Obviously more to come on this.

- Adam

10. Comment by Matt @ Mar 20, 2007 3 PM

I have some questions about the way offsets are calculated. It seems that there are at least two broad categories: projects passing the additionality test and RECs.

Let’s start with RECs. First, address the question that business week raises: Does the purchase of RECs spur the development of new renewable power? Should this be mandated or just assumed (“trust me”)? What seems clear to me is that the only thing that will require increasing amounts of RECs to be produced are hard caps (RPSes) set by legislative bodies such that the caps constantly increase. In this vein, I would tend to evaluate RECs that are produced from states with hard caps more highly (as being more meaningful) than RECs that are produced from states without caps. BTW, what exactly does green-e certification mean for RECs?

OK, now additionality. The idea here is that the project would not have happened if TerraPass did not purchase the credits produced, or contribute financing, etc. Is this as simple as assuming an X% rate of return on a capital investment, where the X% is how much the emissions are worth? Anyway…so doing something to come into compliance with a law is a flagrant violation. What about companies that “were going to do something anyway,” i.e. for PR purposes?

Additionality has always smelled fishy to me — I think RECs are the better route. But if you do choose to use additionality, I think that it can only succeed in an atmosphere of complete openness, and that might be tricky to obtain from private companies who may be leery about opening their financial accounts too widely. I applaud your efforts to be as open as possible and wish you good luck. I want companies like TerraPass to work, but I don’t want to be taken for a ride, either.

11. Comment by Tom Arnold @ Mar 20, 2007 3 PM

Hi Matt:

Let me try and dig in here with your questions.

First on RECs, you raise an interesting point about Green-e RECs and the relationship with RPS compliance. As you may know Green-e RECs can never be used for RPS compliance, so in states where RPS compliance is growing, purchasing Green-e RECs has a function of raising the RPS level. Still, the standard doesn’t delve into this, nor would we be more comfortable making the claim that these RECs would be “better”.

Second on additionality, I’ll point you to how we examine the concept in Tontitown, and some of Adam’s posts delving into what is additionality. Generally, though, PR issues are not a part of the consideration set. We recognize that this is really early in the market, and that’s why we are trying to be as open as we can.

Cheers,

Tom

12. Comment by Herman T. @ Mar 20, 2007 4 PM

Lest we think to quickly that a media article is a carefully researched documentary without a journalistic hook and without a mandate which drive the nature and conclusions of most media effort, I, for one, propose to let TerraPass people work through this before I get too excited. We are all part of a frontier initiative and before anyone gets too excited, lets see what the facts are. My one recommendation is that TerraPass get a solid majority of experts who are not connected with TerraPass. This is no reflection on the two members of the advisory board. It is just a reflectioon of how credibility gets buit.

13. Comment by Aaron A. @ Mar 20, 2007 5 PM

Lest we think to quickly that a media article is a carefully researched documentary without a journalistic hook …

Quite true. Journalists don’t get famous by talking about how wonderful the world is. Scandal, real or imagined, boosts circulation, and circulation drives revenue.

My one recommendation is that TerraPass get a solid majority of experts who are not connected with TerraPass.

From what I can tell, the two technical advisors mentioned above don’t seem to have any financial stake in the company, and they’re planning to invite two completely unrelated parties. That sounds good to me.