CFO Magazine

Carbon Trading

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All in, Nike reduced its greenhouse gases by 18 percent from 1998, far exceeding its agreement with Climate Savers. And in the process, Nike has amassed a registered balance of nearly 8 million metric tons of emission reductions. Other companies, including Whirlpool and DuPont, are also sitting on sizable caches of credits.

Nike did end up selling some credits, which came from the company's reduction of a powerful greenhouse gas called sulfur hexafluoride (SF6). In March, Nike sold 100,000 metric tons' worth of Verified Emission Reduction credits to Entergy, which has also purchased offsets from, among others, Andarko. So far, Entergy has not applied the Nike credits to reduce its corporate carbon footprint. "We're not sure what we'll do with them," says Brent Dorsey, director of environmental programs at Entergy. "So right now we're banking the offsets." Dorsey says the credits, along with in-house carbon reductions Entergy has made, "give us something of a cushion" should federal regulations accommodate banked credits.

What's Wrong with RECs
One offset those regulators will likely recognize are RECs, which are derived from clean energy sources like wind farms and hydroelectric power plants. While power generators can sell the so-called green tags directly, most rely on third-party aggregators. In some cases, those brokers purchase existing RECs from power producers. In others, they buy the rights to future RECs by financing fledgling alternative-energy projects.

Sales of RECs have taken off, with Whole Foods, FedEx Kinko's, Starbucks, and Patagonia among a host of corporate buyers. Green-e, which certifies about half the sales of RECs in the United States, reports that sales of Green-e certified RECs doubled in 2006. But purchasers say demand appears to be outstripping supply. "The last two years, the REC market has been workable," notes Jay Dietrich, climate stewardship program manager at IBM. "But the market is changing. The supply of RECs is slowly being tapped out."

The certificates present other problems as well. While the not-for-profit Green-e engages an independent public accounting firm to certify, among other things, where a REC comes from and how it is generated, the methodology is far from foolproof. In November, Green-e decertified offsets sold by retailer Clean and Green. And experts say some REC certifiers have less-demanding requirements than Green-e.

Moreover, RECs are expressed in terms of kilowatt hours (one REC equals 1,000 kWh of electricity produced by clean energy sources). A widely accepted standard for translating RECs into a carbon-trading unit does not yet exist. Neither does a true national registry for the certificates, which means the same REC can end up getting sold again and again.

The double- and triple-counting of RECs worries environmentalists. It should also concern corporate risk managers. Executives at Green Mountain Coffee Roasters, for example, began shopping for additional sources of RECs a few years ago. The company soon uncovered one attractive project in which the broker claimed to own 100 percent of the RECs, recalls Paul Comey, vice president of environmental affairs at the Waterbury, Vermont-based company. When a colleague began researching the project, however, a different picture emerged. "As it turns out," says Comey, "a city in Florida claimed it owned 10 percent of the same RECs."

Carbon: The New Cash Crop
With RECs getting harder to find, some American businesses have started looking abroad for new sources of offsets. So far, buyers have concentrated on projects in India and especially China, whose reliance on coal creates many opportunities for emission reductions. Since businesses in those countries have no greenhouse-gas targets, any new reduction scheme creates a potential credit to sell. In 2006, global sales of the credits hit $5 billion, twice the volume from the previous year, according to the World Bank.

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Posted by Louisa Nara | January 08, 2008 11:00am