CFO Magazine

Carbon Trading

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That prospect worries some environmentalists, who argue that purchasers of offsets are simply outsourcing their obligation to combat climate change. Others claim that offsetting enables a company to brand itself "green" without actually being green. Those critics say buying carbon offsets does little to change how carbon-addicted companies operate. "It's like the medieval practice of buying papal indulgences," complains Frank O'Donnell, president of the not-for-profit Clean Air Watch. "If sinners throw a few bucks into the pot, they can go back to sinning."

And who knows what they're buying? A list of current CO₂ trading credits reads like an environmentalist's eye chart (see "Accounting for Waste" at the end of this article). Derived from an array of carbon-reduction schemes, the credits are often calculated using different methodologies and accounting standards. Third-party brokers don't necessarily bring clarity to the subject. One study conducted by the not-for-profit Clean Air–Cool Planet rated 30 such firms across seven criteria, including the use of third-party verification. Only eight vendors merited a passing grade, and the report went on to note that "few retail offset providers provide anywhere close to the amount of project-specific information [to allow buyers] to effectively evaluate offset quality."

This lack of transparency could come back to haunt corporate purchasers. Nancy Hirshberg, vice president of natural resources at yogurt specialist Stonyfield Farm, says the company has looked at scores of offsets. "Many of the projects were simply not verifiable," says Hirshberg. "It's definitely buyer beware."

The potential for purchasing worthless credits explains why a few finance chiefs are already getting into the carbon issue. Denault says Entergy's finance group examines all offsets the company purchases. "Like any commodity, we want to make sure that the credit will have future value," notes Denault. "We want to make sure we're purchasing real securities."

Limits Are Coming
At this point, the future worth of a carbon commodity is tough to call. What seems easier to suss out: Congress will undoubtedly place some sort of carbon restrictions on corporations in the next three years. Managers who dispute the assertion are misreading the signals now coming out of Washington. As Hirshberg points out, "Businesses now back carbon legislation."

Most likely is a federally mandated cap-and-trade system, like that proposed by Sen. Joseph Lieberman (I–Conn.) and Sen. John Warner (R–Va.), whereby businesses will be given specific carbon-reduction targets. Such a scheme will likely require businesses to reduce their emissions by a certain percentage from a previous year (known as a baseline year). But at this point, it's unclear what year Congress will choose as the baseline.

For early movers, such as Stonyfield, that means any credit purchased or produced in the run-up to legislation might end up being worthless. But the yogurt-maker's commitment to CO₂ reductions also serves to emphasize the company's "green" image among consumers. Managers like Denault understand that industrial businesses — and particularly power providers — produce the most CO₂ emissions. They therefore stand to be hardest hit by federal carbon legislation. Stashing credits helps hedge that risk. "Those credits may have value in reducing your [carbon] profile," says Denault, "but that's assuming legislation allows for them."

The uncertainty surrounding carbon credits has not deterred many U.S. businesses from jumping into the offset game, however. Nike has not only purchased offsets, it has produced them. The apparel maker generated the credits through an agreement signed in 2001 with the World Wildlife Fund's Climate Savers. Under Climate Savers, a voluntary program that both sets reduction targets and verifies participants' progress, Nike agreed to lower greenhouse gases from company-operated facilities and employee business travel some 13 percent by 2005 (from a 1998 baseline). Notes Sarah Severn, a director in Nike's corporate responsibility group: "We wanted to go through a registered and verified process with Climate Savers in case there was an opportunity to trade the credits."

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