Roger D. Feldman

By Roger Feldman

Historians will look back at early 21st Century America as a time when three very different skills reached great heights, converged, and produces unintended as well as positive consequences. One was the ability to mobilize multiple communications media to instantly bring issues and propositions to the forefront of people’s minds. The second was the seeming capacity of global scientists and engineers to do virtually whatever was determined to be done, but on a cost and time scale more imposing than innovation in the past – with the result that sustained public support was directly or indirectly required. The third was the ability of economists and their financier brethren to conceptualize and, with the aid of computer power, conceptualize new economic value and actualize new financial markets which (in the best of all possible worlds) linked together the focus of engineering and finance on emerging public issues. Unfortunately, historians may also remark that the ability of American society to synchronize the application of these skills so that desired results consistently could be obtained (despite unbounded optimism, reams of electronic analysis, and big stakes investment) was limited by the operation of unbounded commercial interests. As the summer of 2007 draws to a close, there may be a near term example of the effects of this lack of synchrony: the mortgage securitization/credit crunch crisis. We must be alert to prevent the possibility that the intertwined concepts of sustainability, emissions trading, and carbon finance go the same way. Among other unintended consequences, its ramifications for renewable energy development could be adverse.

With this concern in mind, consider the announcement that the Federal Trade Commission has agreed to examine the growing roster of companies that allow consumers to pay for a “carbon-neutral” project as a way to offset their travel and other lifestyle choices. The House Select Committee on Energy Independence and Global Warming requested this FTC probe of the $100 million a year offset industry. The focus was not so much on the techniques to create the offsets -- although this is an issue which is beginning to attract attention -- but on the questions of whether the projects would have occurred anyway, or the same offsets were being sold several times over. “Beware of the Carbon Offsetting Cowboys,” blared the Financial Times; “Another Inconvenient Truth,” sneered Business Week.

The intersection between legal liability and sustainable environmental program design (and also incidentally Renewable Energy Credits marketing) is well defined. Conformity with the FTC Act should not be at odds with a workable voluntary emissions trading program. Environmental marketing claims have been subject to FTC marketing guidelines for over 25 years, which basically call for appropriate qualification, non-overstatement of benefits, fair comparison and substantiation based on reasonable scientific and professional evidence. The guidelines also make clear (which may be important in the voluntary emission reduction context) that third party certification, by itself, does not necessarily protect an advertiser -- or by extension, a certification program on which a third party relies. Financial liability for false advertising may also be possible under the laws of several states.

What makes the matter more complicated is that, in the U.S. market, there are no binding voluntary environmental credit standards. There are draft standards issued by responsible organizations such as the California Climate Action Registry, the International Emissions Trading Association and the Center for Resource Solutions. Reference may be had, of course, to the standards established for “offsets” under the Kyoto Protocol’s Clean Development Mechanism (CDM), but these standards, which establish protocols for establishing emissions baselines and defining “additionality” of emissions above those baselines, require tailored application in the U.S. setting. (They are also cumbersome to apply. As the actions of the Renewable Greenhouse Gas Initiative (“RGGI”) Offset Standards established by several Northeastern states recognized, it may be far more efficient to establish objective performance for multiple projects of a given type, than apply the laborious CDM case-by-case approach to a series of site-specific proposals. The RGGI Model Rule identifies specific types of projects and has numerical and geographical limitations on offsets.) It remains to be seen whether regional and state program efforts to create all encompassing, standardized “offset” programs will take hold. It is also problematic whether, if the U.S. adopted a definitive cap-and-trade legislative program, the existence of voluntary programs, and for definitions under voluntary standards, would be swept away. There would still be settings for their applicability.

Until effectively resolved, this backdrop of uncertainty may affect also the future of renewable energy. (You perhaps remember renewable energy, it was the iPhone of ’06 that, among other things, contributed to a “cleaner environment.” This year’s iPhone, of course, is “sustainability” and “carbon neutrality.”) What is of underlying importance for the renewables industry is that there has been a partial disconnect in the public mind regarding the relationship between it and the goal of carbon neutrality. There is public uncertainty as to the manner and extent to which renewables use passes the carbon reduction tests applicable to other sustainable alternatives. For a significant part of the public, that sustainability role is more important than the role renewables can play in achievement of relative energy independence or contribution to economic development. The public is not about to call in the FTC on the question of whether renewables are a bogus solution to national carbon reduction needs. But the proponents of alternative renewable solutions for this purpose are rare, not just in arcane PUC and Congressional hearings, but in the national back fence caucus of our internet age. In addressing their contribution to “greenness,” renewables must address their relative relationship to everything from green buildings to national tree planting sequestration strategies, to energy efficiency. (A kind of precursor of this type of argument can be seen in the RGGI model rule which requires every state to apply a portion of the value of carbon auction allowances to reduce the cost of the cap-and-trade program through investments in energy efficiency or other clean energy technologies. Early research suggests the desired result may be easiest obtained through energy efficiency.) The financial community, meanwhile, wants to trade carbon credits -- it is not differentiating among the potential sources.

Consequently, the issue of establishing definitive carbon savings “protocols” is not just an issue for the “dark ages” before there is a US carbon trading regime. This is not just an issue of whether a company seeking to be “carbon neutral” gets egg on its face when it’s offsets turn out to be problematic in nature. It relates to the defensibility of the role which renewables seek to stake out for themselves. Renewables are challenged by the 21st century convergence of morphing media celebrity, the ongoing real world requirements of sustained capital supply, and anonymity of their carbon benefits to the carbon grant/finance markets. While as a society the United States at least believes it can climb any mountain or resolve any “public policy” issue through privatized market mechanisms, there remain uncertainties as to how doing so with renewables relates to other issues that have caught its attention, i.e., the linkage of renewables to voluntary sustainability initiatives. Proponents of renewables should press for firm sustainability measurement standards as part of any carbon regulation scheme and for demonstration of the relationship of these standards to renewable capabilities. Otherwise, the “creditability crunch” creating the current carbon haze over voluntary green tag programs can spread to renewables as well. Failure to do so can result in counter-productive carbon hazing. ___________________________________________

ROGER D. FELDMAN Roger Feldman is in the Washington DC office of Andrews Kurth, LLP [202-662-3048; rogerfeldman@andrewskurth.com.], where he is a senior member of the Clean and Renewable Energy Group. He chairs the American Bar Association Special Committee on Energy and Environmental Finance and the American Council on Renewable Energy Trading Markets Committee. He specializes in energy/environmental finance and related regulatory matters.

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