Guest Column By Virginia Simpson, CEO, Simpson & Partners
In the rush to greenness no sector of the business world is moving faster than finance. Financial institutions of every stripe and size are positioning themselves as eco-friendly.
Preferred interest rates are offered to those who buy hybrid cars or add solar panels to their homes. The toaster to welcome a new account is replaced by the promise of trees planted to offset the customer’s carbon footprint. And the old becomes newly green.
We understand mortgages and car loans, CDs and savings accounts, so these variations on familiar themes are met with enthusiasm. But the big news is carbon credits, unfamiliar and in serious need of explanation.
So, exactly what is a carbon credit and why is it so controversial? A carbon credit is the representation and monetization of the removal of one tonne of CO2 or its equivalent from the atmosphere.
CO2 is the most prevalent of the six greenhouse gases believed to be a cause of global climate change. A by-product of almost every activity in the industrialized world, giving it a monetary value creates the basis for a cap-and-trade system which provides economic incentives for removing harmful emissions from the environment wherever and whenever possible.
Good intentions notwithstanding, it is not always possible to stop emissions at their source. Stopping emissions at an alternative site is just as environmentally beneficial. It is, after all, a global problem, not a neighborhood or regional one.
Balancing emissions in this way means that entities with low emissions are given credits for their clean development which can be sold to high-emitting entities who use the purchase to offset their emissions. This trade-off provides a short term, immediate response to the issue.
Carbon credits are by no means a free pass for higher emitting groups to keep on polluting. Rather, they are a means of buying time while ways of reducing actual emissions are explored.
This is where some of the confusion seems to arise — at least for those who do not examine the differences between the voluntary system here in the US and the mandatory system in countries which are signatories to the Kyoto Accord.
Under Kyoto, industrialized nations have emissions limits arbitrarily set for them, while developing nations have no limits and are able to use any diminution in emissions to gain credits which they can then sell to industrialized signatories.
An example of this is China saying it will not build a new dirty coal powered energy facility and, for its commitment to clean development, being awarded carbon credits which can then be sold to, say, Canada, whose Kyoto assigned limits are so severe that functioning within them is virtually impossible.
Building a power plant de novo with clean technologies is by far the better choice, so carbon credits for pledging not to build in old, technologically inferior, dirty ways could smack of blackmail and a punishment of highly industrialized nations — a thought to consider if there is any question in your mind as to why the US did not sign the Kyoto Accord.
Although built like Kyoto around carbon credits, the US system is voluntary and is shaped by free market forces and an entrepreneurial spirit. It holds great promise not only for vibrant high-profit trading but also for underpinning the development of real solutions to the challenges of 1)global climate change and 2)American dependence on foreign fossil fuels.
In the US, carbon credits are traded on the Chicago Climate Exchange (CCX), a voluntary bourse like the New York Stock Exchange. CCX members sign legally binding contracts to cut their emissions by at least 6% by 2010 vs. a baseline period of 1998-2001, to develop plans for clean on-going operations, and to offset what they cannot mitigate. CCX began in 2003 with 14 members and today boasts almost 300.
Americans are pursuing every avenue to develop new technologies and to apply hitherto underutilized practices in environmental management. New fuels, waste-to-energy technologies, advanced forestation, genetically improved crops of all sorts — some being supported by venture capitalist who are factoring in the potential of carbon credits in deciding venture valuations. Carbon credits based on innovation are the desirable outcome of free market forces, and the likeliest route to environmental stability.
According to Ed Heslop, CEO of industry leader Environmental Credit Corp, those who trade carbon credits are “sponsoring immediate, significant reductions in GHG emissions using the best current technologies while continuing to work on their own internal improvements and underwriting the technologies of the future. The commitment is to capture, reduce, avoid or offset — and carbon credits are the all-important offset piece of the picture.” Each time we venture into new territory it takes some time to get it right — and probably from the days of wampum, new financial instruments have been looked at warily. But consider this: not so long ago “acid rain” was the rallying cry of the environmental doomsayers. Sulfur credits (a carbon credit ancestor) were so effective in addressing the problem that we no longer even hear the term.
There are ideological purists who decry any system that allows us to continue living as we normally would. For them, riding our bicycles on I-85 is better for “the cause” than carbon credits. But for those of us who love the accoutrements of the 21st century, carbon credits provide an excellent, if not perfect, new currency for financing the fight against global climate change.
Legislation that reflects more Kyoto-like thinking may be coming — and sooner than we’d like. But for now, carbon credits still come in two ways: the mandatory “big stick” approach of Kyoto, and the voluntary “juicy carrot” of the US. If you get with the program now, your efforts may well be shining examples for our lawmakers to incorporate as they move into legislating mode.
Virginia Simpson is CEO of Simpson & Partners (www.simpsonandpartners.net), a multi-disciplinary consulting consortium established in 1980 with expertise in strategic planning/marketing, technology fulfillment, environmental sustainability and stewardship and corporate entrepreneurship. She has lectured at Cornell University, Dartmouth College, Fairfield University, Harvard Business School, Clemson University, Furman University and presented to the US Department of Agriculture.
