Green Investing
January 09, 2008 |
F.T.C. Asks if Carbon-Offset Money Is Well Spent
The Federal Trade Commission held a hearing to discuss carbon offset trading. Carbon offsets are currently sold through a variety of mechanisms with only voluntary certification, prompting the agency to investigate. The FTC's inquiry into the industry will raise awareness about the lack of consistency in the way offsets are verified and consider their actual environmental benefit of tree planting or other measures.
Once the FTC comes knocking, industries are put on notice that regulations or Congressional hearings could be in the future. This usually is enough to spur industry groups to offer to self regulate, as was the case previously after internet advertising and privacy hearings.
Read more at The New York Times.
Entrepreneur Goes From Dirty to Clean
Gary Kremen had the foresight to invest in Internet domain names (website addresses) long before there was a Yahoo or Google. He made millions by owning and selling Match.com and other web properties. His ownership, loss by theft, and relentless pursuit to regain the Sex.com website has become part of Internet lore and was chronicled by the book Sex.com. Kremen has now turned his energy towards the financing and marketing of renewable energy through his company CleanPowerFinance. Kremen spoke with Matter Network about what he learned about marketing during the Internet boom and how the current surge in interest in renewable energy compares. MN: What did you learn from owning websites and the Internet boom that applies to financing of solar and renewable energy?
GK: I realized that the domain name world is real estate world, not a technology world. One thing you learn to focus on is the big markets. However you slice it, energy is a big market. Renewables -- and solar especially -- is as big as the Internet if not bigger. I learned to focus on a good wave that is going far and sticking with it. The Internet was a good wave for 15 years, and maybe for another 5 to 10 years. Part of this wave is doing a land grab, which is what the company SolarCity is doing in the branding of solar in the consumer space. There was no one with a brand there, and I'm surprised it took someone so long to do it.
MN: Why did you choose to create a company focused on financing of renewable energy instead of investing in energy production or some other aspect?
GK: Even though the name is CleanPowerFinance, we are more than just a finance company. We consider ourselves sales support services for installers. We have bidding and provisioning software and lead generation software. It's an old saying that if there's a gold rush, you want to be the one selling shovels. I think being involved in production is like trying to mine the gold, and I'd rather sell the shovels. You are better off selling products and services to those who are doing the mining.
MN: What do you see as the void in the available financial and marketing services that you are filling?
GK: Installers are good at what they do, but financing and marketing is not their area of expertise. Instead of working with a bank where they hand things off and then don't hear anything more, we are keeping the installer informed at every step of the way. A bank can only sell the product that they have, and we are just focused on products optimized for solar; the "secret sauce" that reduces the mandatory cost of purchasing solar.
MN: How do you find customers to get them interested in being matched up with installers?
GK: From the lending side we get our leads from installers. To find consumers, we use traditional Internet tools including lead generation, search engine optimization, Google AdWords, and affiliate programs. These things are used in mortgage industry.
MN: What is unique about the financing programs for solar today, and what types of programs are missing to make it easier for customers?
GK: Banks are not giving credit for solar and other renewable energy sources' main attribute, which is reducing the mandatory monthly expenses. If you have two houses, one in Portland and one in San Diego, they might have very different energy bills, but lending agreements are being undewritten as if their energy expense is exactly the same. As energy costs increase, that liability is going to get larger. In some places like the central valley of California an energy bill -- which is not tax deductible -- can be higher on a tax-equivalency basis than the entire mortgage. Was that taken into account when the loan was written? No. If a $50,000 investment in renewable energy is sized right, then it should be cash positive over the life of the loan. We have looked around to find banks that will take that into consideration. Installers also need to do a better job of marketing the financial benefits. We are giving installers the tools so that they can talk with customers about what their after-tax monthly payments will be.
MN: What is your business model for generating revenue?
GK: We make money in two ways, one on the lead generation, such as $5 for an unqualified lead or $60 for a qualified lead. If there's a sale, the fee could be 1-2 percent of the closed order. On the loan side there is an origination fee based on the value of the loan; we would receive about 1 percent, or about $300 on a $30,000 loan. We also get licensing fees for licensing our software to installers.
MN: How do you compare the hype factor around the renewable energy space today versus the hype that went on during the Internet boom?
GK: If you compare the renewable energy space today, it's not as sexy as the Internet is. You can't brag at a cocktail party about the cool widget that someone can go look at online, or a food delivery service for pets. A lot of the technology surrounding renewables is evolutionary, not revolutionary. On the PV (photovoltaics) side, we'll get better efficiency in the one-half to one percent range, but I don't think we are going to have any great leaps. The hype of doubling efficiency of solar panels just isn't going to happen.
MN:What is necessary to change in the marketing of renewable energy for it to become a meaningful component of our energy equation?
GK: First it must go from hippies selling solar to save the planet to a purely economic basis. The second thing is that installers have to realize that they are in the sales business not in the technology business. I have seen many installers come in and talk about the technology, but consumers don't care about that, it's ridiculous. They should have proposals with lots of graphics to make it easy to understand -- the sales process doesn't shine today, and it should. Every solar installer should take a two month leave and go sell cars, which similarly is mostly about financing. Some think their products sell themselves, and they don't. MN:Is there a bubble occurring in the current rush of investment for renewable venture capital?
GK: I think there is going to be a pullback. Not all of these PV ventures can win. There will be winners and losers. Some of them are ill thought out, like solar concentrators. If you spend anytime in Silicon Valley, you see that the white boys follow each other around on Sand Hill Road. They hear about others investing in solar, and they want to do it too.
MN: Why are so many investment companies that previously backed Internet startups now investing in renewable energy?
GK: Now people see a shift. There's been $3 billion in investment, energy costs are rising, consumers don't want fossil fuel based power plants. A lot of them are going to stumble because they are investing in project financing companies instead of technology companies. There are 8 or 9 companies in the PPA (power purchase agreement) funding area, and they aren't all going to make it. These companies' business model is to offer a business deal where they sell the energy for some period of time instead of the utility, and they will own the production plant. Examples are SunEdison, SunRun Generation, MMA Renewable Ventures. The market isn't big enough to support all of these players, and large customers aren't idiots and they will think that they can do it better themselves.
MN: What other financing models will evolve in the renewable energy area?
GK: The city of Berkeley is going to allow people to finance solar through tax assessment on their property. On the surface it seems smart, but it may be bad for (my company). What also makes sense is for local governments to guarantee loans for solar equipment or doing credit enhancements. Solar subsidies and tax incentives are too expensive to be continued for the long term.
The CliffsNotes on Clean Tech
If you want to make money from the clean technology revolution -- through investments, employment or cutting costs -- then The Clean Tech Revolution by Ron Pernick and Clint Wilder is a must read. Like CliffsNotes does for classic literature, this book condenses the essential information about the technologies, players, challenges and opportunities across the spectrum of clean technologies into 285 accessible pages. Clean tech is defined by the authors as "any product, service, or process that delivers value using limited or zero nonrenewable resources and/or create significantly less waste than conventional offerings."
Chapters covering solar, wind, biofuels, green building, transportation among others provide concise breakdowns of the technologies and companies that are at the forefront of their respective industries. The authors size up the market opportunity for each industry and predict the likely leaders.
Each chapter identifies "breakthrough opportunities," technologies or new business models that if commercialized could be disruptive to existing markets. Each chapter's list of "ten to watch" is a shorthand guide to up and coming privately and publicly owned companies that are worth investors' attention. Even if you are skeptical of the pace at which clean technology will be adopted, it's good to know who the competitors will be and their offerings.
Although it contains a plethora of statistics and projections -- much of it gleaned from research by the co-authors' Clean Edge research -- the book is an engaging read that will have you running to your computer to act on what you're learning.
While the biofuels, wind and solar power sectors may be familiar opportunities to many readers, the book identifies one under-reported area that will be critical to anyone who owns an electrical device. The Smart Grid chapter outlines the technologies needed to update the patchwork power grid into a stable and efficient distribution mechanism.
The book concludes with chapters about the economic opportunity of the clean tech revolution as whole and how cities such as San Francisco, Chicago, New York, Austin and Portland are creating "clean tech clusters" that are energizing the local economies.
There's also a chapter on clean tech marketing, including correcting a mistake that many clean/green companies have made -- focusing on the environmental impact of their products instead of leading with the economic benefits. "...It's very touch to convince mainstream consumers to pay significantly more for a cleaner more efficient product or service." Tell people how much money they'll save in the long run, however, and you have a lot more people listening.
The Clean Tech Revolution isn't a tome preaching to the choir of environmentalists; it's an agnostic analysis of a business and transformation that will be larger in magnitude than the industrial revolution.
(Disclosure: I have known the authors personally and professionally for some time. The book is also available from Amazon through our "Books That Matter" section.)
CleanTech and GreenTech on Display
The AlwaysOn GoingGreen conference underway in Davis, California showcases the leaders in developing sustainable technology. Bambi Francisco of Vator.tv and Tony Perkins of AlwaysOn (video)discuss how best to categorize the sector, the capital flowing into it, and some of the leaders.
Ranking the Offset Providers
Carbon offsets and offset providers are currently not regulated, and the lack of standards makes it difficult to ascertain the quality. Offsets, which are intangible and purchased largely based on faith in the seller, vary widely in their quality, according to Derik Broekhoff, senior associate in the climate and energy program at the World Resources Institute. Consumers looking to purchase offsets "must do some homework" to understand how to recognize a quality offset because of the lack of standards and regulation, he says. One attempt to gauge the quality of offsets and providers is the Consumers Guide to Carbon Offset Providers study. The study describes the following characteristics of a quality offset project:
The report, conducted by Trexler Climate and Energy Services (now part of EcoSecurities), rated offset providers for their transparency in providing information about their offset projects and understanding of the requirements of generating quality offsets. Just 8 of 30 offset providers surveyed (see the list here) scored 5 points or higher out of 10, according to the report. The report noted that many sellers failed to provide "basic information and transparency" and offered "insufficient information about the projects used to generate offsets."
Without government regulation or an independent standards body to oversee the offset market, consumers are left to base their decisions about quality on what they learn from the companies themselves. "The quality (of an offset) depends on how they are represented, guaranteed and defined" by the selling agencies, according to Broekhoff.
Some offset sellers either self-regulate or hire independent organizations such as the Center for Resource Solutions. The most respected international offset certification program is the voluntary "Gold Standard" Clean Development Mechanism that was created by the designers of the Kyoto Protocol.
The upcomingVoluntary Carbon Standard, which is being co-developed by four international non-profit organizations, will increase consumer confidence, but government regulation is necessary, Broekhoff says. He compares today's carbon offset market to the early days of organic food production. "It didn't get sorted out until the Department of Agriculture came in and put their stamp on it."
Further confusing the carbon offset market are alternative mechanisms for reducing carbon emissions called carbon credits (also known as carbon financial instruments) and renewable energy credits.
LiveNeutral is a San Francisco-based non-profit that purchases "carbon credits"(also known as carbon financial instruments or CFIs) from the Chicago Climate Exchange (CCX), a market that sells voluntary emissions reductions. CCX member Ford has pledged to reduce emissions over a baseline amount in the coming years. If the company exceeds that pledge, than it can sell the credits, or if it does not meet the obligation, then Ford is legally required to purchase credits.
Individuals are not able to trade on the CCX directly, so LiveNeutral provides people with an opportunity to participate, according to director of marketing Jessica Williams. As carbon credit prices rise, companies will have greater incentive to reduce their emissions, Williams says. The goal was "to make it more profitable to be clean than dirty."
While some consumers might not want their carbon credit dollars to financially benefit large corporations that are among the greatest contributors of greenhouse gases, "if you look at it purely from a climate change standpoint there is not a difference" in the markets, says the WRI's Broekhoff. Removing a ton of carbon will have the same benefit no matter who does it or benefits financially.
Mark Trexler, the managing director for global services of EcoSecurities, says carbon credits generated by organizations that voluntarily reduce their emissions shouldn't be considered the same as carbon offsets. Trexler, who co-authored the Consumer's Guide study, says the CCX credits do not have the characteristic of additionality, as they came from funding and actions by the organizations, and not derived from offset revenue.
LiveNeutral's Williams says her organization recognizes the distinction and therefore only uses the word offset as a verb, and not a noun.
Another option for reducing carbon emissions is the renewable energy credit, which also is known as a renewable energy certificate or REC. RECs are created when wind, solar, geothermal or hydro-electric power is used to generate electricity that is sold as "generic" electricity instead of the often higher-priced renewable energy. Several states have enacted market systems that entitled utilities to sell a credit for generating renewable energy as a REC. RECs are sold directly or traded through brokers such as NativeEnergy, which also sells carbon credits.
These similar sounding functions are adding to consumer confusion about carbon offests. "Moving CFIs and RECs into the retail offset market is likely to undercut the environmental integrity of the market and disrupt the ability of the market to deliver carbon neutrality," state the Consumer's Guide study.
Following the Money Trail
Carbon offsets vary greatly in price, but comparison shopping may say more about the seller than the quality of the offset. Carbon offsets sold at higher prices don't necessarily imply a better quality offset, nor do they correlate to the cost of creating the offset, according to EcoSecurities' Trexler.
The Climate Trust's Jorgensen says the cost to produce each offset varies depending on the project, but the organization charges a consistent price for offsets. "We don't just look at the most cost efficient way of producing an offset. We also look at the residual benefits," he says. Preventing trucks from idling not only reduces carbon emissions, but also removes particulates and nitrogen oxides, according to Jorgensen.
Purchasing a carbon offset will likely reduce greenhouse gas emissions, but it may not be the most cost-effective method of reducing your emissions. Reducing your carbon footprint should be the priority, (through aversion strategies or the purchase of energy-efficient appliances or light bulbs), then buying renewable energy, and then carbon offsets, according to WRI's Broekhoff.
Non-profits, who often acquire the offsets from commercial companies, tend to direct more money to the projects themselves than the for-profit companies. Some for-profit companies use as little as 15 percent of their sales to obtain offsets, according to a study by Tuft's Climate Initiative. How much of the revenue is dedicated to administrative overhead versus sales profit depends on the organization.
In some cases the majority of the cost of an offset coming from administrative overhead can be a good thing, EcoSecurities' Trexler says. If a company is thoroughly investigating the carbon reduction projects and closely monitoring the progress to ensure that the carbon reduction occurs, then a higher administrative cost is acceptable, he says.
Carbon offset vendors that try to compete primarily on price and whose customers can't judge the quality of their purchase have little incentive to create a quality product, according to Trexler. Without quality assessment "You inevitably wind up with a race to the bottom," he says. "It's a market failure waiting to happen."
Carbon Offset Confusion
From national governments to media companies such as News Corp. to food growers, organizations of all stripes are going carbon neutral by reducing and offsetting emissions. The desire to buy offsets for the emissions that can't be eliminated has created a "green rush" of new offset companies, but a lack of standards is confusing consumers and endangers trust in a market that today is largely based on faith. The ideal of having a carbon footprint of zero -- emitting no more greenhouse emissions than you sequester -- became so popular in 2006 that "carbon neutral" was recognized as the word of the year, and the idea continues to flower.
The desire to go carbon neutral can stem from many things: genuine environmental concern, financial considerations (as fewer emissions often equal greater operating efficiency), generating positive PR, or even alleviating personal guilt. Regardless of the motivation, the demand for carbon offsets has ignited commercial and non-profit organizations to fill the void.
More than 40 organizations around the world now sell or participate in the carbon offset market, including the U.S. Forest Service and investment house Morgan Stanley. Carbon offset sellers decide what if any third-party oversight is involved, which has prompted concerns about the quality of the offsets. In response, the Federal Trade Commission will reportedly investigate the nascent industry.
But just as global warming has its naysayers, so does the carbon offset market, with some comparing writing a check to compensate for one's carbon footprint to the Catholic Church's former practice of selling indulgences to remove sin. Fox News' Sean Hannity has contradicted the company line in speaking out against offsets, while parody site "Cheat Neutral enables straying spouses to offset their indiscretions.
Guilt-Free and Easy
Americans on average create approximately 21 tons of carbon emissions per person each year, compared to a global average of 4.5 tons, according to Trexler Climate and Energy Services. Carbon offsets are priced between $4 and $20 per ton, so for somewhere between $100 and $400, individuals can (at least in theory) counter their annual carbon emissions.
Offsets are growing in popularity partly because they provide a feeling of being environmentally conscious without a change in lifestyle or business practices. By purchasing a carbon offset you can "buy yourself out of making harder choices," says Anja Kollmuss, the outreach coordinator at Tufts University's Tuft's Climate Initiative.
Finding a company to sell you an offset is easy, but understanding the environmental value or quality of an offset can be as complicated as mastering the federal tax code. Carbon offsets fall into two general categories: the reduction (or prevention) of future carbon emissions, or the sequestering (storing) of carbon that has already been released into the atmosphere. Most carbon offset sellers use a variety of sources and types of projects and disclose the information on their websites
Developing clean energy sources that do not emit carbon or implementing improvements in energy efficiency are the most common projects that offset providers fund. For example, offset seller Climate Trust is participating in an truck stop electrification project, according to marketing and communications manager Jed Jorgensen. The group partnered with transportation company ShurePower to provide charging stations to run the electrical systems of trucks that are at rest. Instead of idling their trucks for several hours and burning diesel fuel, the trucks are plugged into electric outlets that produce much less carbon per hour than a truck engine, Jorgensen says. The project is only economically feasible because of the selling of the carbon offsets, he says.
Sequestration projects plant vegetation or trees to take the carbon out of the atmosphere take several years to reach their maximum ability to reduce the carbon in the atmosphere. Carbon offsets that sponsor sequestration projects will be described as future emissions reductions on the sellers' websites. These projects can counter deforestation and provide a wildlife habitat, but according to Tufts' Kollmuss "sequestration projects are not a great way to reduce carbon."
For example, it is difficult for carbon offset sellers to guarantee that the forests are permanent, since they could be destroyed by fire or harvested, Kollmuss says. Therefore, offsets based on future reductions might never occur. A study of offset programs that she co-authored does not recommend tree planting offsets "because of all the uncertainties involving bio-sequestration projects."
Where the trees are planted can also make a difference in their ability to counter climate change. A recent study by the Carnegie Institution found that trees added to the tropics help to cool the earth while trees planted in snowy areas can absorb more sunlight and warm the area rather than reflecting the light.
Next: Ranking offset providers.
Success ... Redefined
Some cynics – and there are always cynics – say we shouldn’t be seduced into finding hope in the examples set by rail-thin actresses trading limos for hybrids and spending their vacations tromping through virgin rainforests on MTVs Trippin. They say those images have more to do with “ego” than with “eco.”
I say … so what?
I mean, if we wait until everyone embraces renewable energy technologies, low-impact travel and more enlightened business practices because doing so is the right thing to do … well, we’ll be waiting a long, long time. People, in general, don’t work that way.
People, by and large, want what’s easiest, what’s coolest, what gives the most bang for the buck. Especially if movie stars are doing it, or they see it advertised during “American Idol” and it comes with 0% financing and a money-back guarantee. Especially in America, where it seems depressingly impossible to find anyone who remotely understands the concept of short-term sacrifice for long-term gain.
Compare the amount of money spent on fad diets and late-night infomercial exercise equipment with the number of truly healthy Americans and you get an idea what I’m talking about: Sure, we all WANT to work out more and to eat better, but chances are we’re still trying to shed that same pesky ten pounds we’ve been working on since high school. Or twenty. Probably more like twenty.
It’s just a hell of a lot easier to swing through the drive-thu at McDonald’s than it is to cook up a Zone meal, isn’t it? And cheaper, too.
So that’s it in a nutshell: when faced with a choice, Americans – and most people – go with “cheap” and “easy” over “good” or “right.”
Oh – and “fun” and “cool,” too. It’s gotta be something you can brag about to your neighbors.
So if we’re ever going to really untangle our energy mess and our conspicuous consumption and our habit of trampling all over the Earth like a pack of dogs through the global neighborhood‘s flower gardens, we need to find ways to make doing the RIGHT THING easy and cheap and fun and cool.
And you know what? It could happen. Sooner than you think. Just as the digital revolution changed the ways we work, live and interact, so too will the next wave. It’ll result in a flood of new products and services and require new ways of evaluating what’s worthwhile and what’s a waste of time.
That shift in priorities spells opportunity, too. Smart people who can get past the political polarization of the arguments and who figure out how to appeal to a new, growing group of people all along the political spectrum who want their latest-and-greatest to also be cleanest-and-greenest -- no matter how selfish or altruistic their reasons -- will reap HUGE rewards. When a new wave of consumers starts to see that they can actually save money by buying hybrid cars or installing solar panels or replacing their light bulbs with energy-efficient versions, that growing throng of wallet-wielding potential customers will create this revolution’s Bill Gates.
People – and businesses – are seeking ways to do well and good at the same time. And that balance, that sweet spot where life is rich and soul-satisfying and we can start to feel better about ourselves because we’re reversing direction and finding ways to embrace technology for the greater good, that will become the new definition of success.
And that’s what we’re all about.
Because in the end, finding and embracing every opportunity to improve our lives while simultaneously reducing our impact is what really Matters.