Climate Change UncertaintiesClimate Change UncertaintiesOpportunity for Business Innovation?Opportunity for Business Innovation?

Possibilities of Offsetting CarbonPossibilities of Offsetting CarbonMarch 27, 2008March 27, 2008

George F. HoguetGeorge F. HoguetDirector of Product MarketingDirector of Product Marketing

““Climate change is a real problem. Climate change is a real problem. ... If ... If we do business as usual ... by the year we do business as usual ... by the year 2030 we will hit the [amount greenhouse 2030 we will hit the [amount greenhouse gas emissions] that scientists say is the gas emissions] that scientists say is the threshold of catastrophic climate threshold of catastrophic climate change change ... which means we have to get ... which means we have to get going now.going now.””

Ray AndersonRay AndersonFounder & Chairman, Interface, Inc. Founder & Chairman, Interface, Inc.

World GHG Emissions Reduction Scenario60% Reduction from World 1990 Levels by 2050

World GHG Emissions Reduction Scenario60% Reduction from World 1990 Levels by 2050

19801980 20002000 20202020 20402040 2100210020602060 20802080

Annex IAnnex I

Non-Annex INon-Annex I

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2.22.2

KyotoKyoto

After John Byrne et al (2004)“Reclaiming the atmospheric commons: Beyond Kyoto.”After John Byrne et al (2004)“Reclaiming the atmospheric commons: Beyond Kyoto.”

Center for Energy and Environmental PolicyCenter for Energy and Environmental Policy

Legislation Is Clearly Needed

US Market Is EvolvingUS Market Is Evolving Compliance coming as RPS and COCompliance coming as RPS and CO22

cap – Utilities. Heavy industry later.cap – Utilities. Heavy industry later. Voluntary green power and carbon Voluntary green power and carbon

offset market for consumers and offset market for consumers and other businesses growing at 100+%other businesses growing at 100+%

Starting point is a GHG Inventory – Starting point is a GHG Inventory – determining Carbon Footprintdetermining Carbon Footprint

Sources of Carbon Footprint

Mitigations

Digesters Biofuels Efficiency– Process Consolidate New Systems “Beano” Go Local Solar Co-Generation Biofuels Efficiency

Ag Methane Fuels Electricity – Heating Fuels Refrigeration

Yogurt

“ Offsets are designed to ensure that emissions do not continue to rise. They do not, however, decrease emissions, which is essential to addressing climate change drivers.

When offsets are coupled with corporate efforts to concurrently decrease total emissions, they can become an essential part of corporate climate strategy.”

Offsetting Emissions: A Business Brief on the Voluntary Carbon MarketBusiness for Social Responsibility December 2006

Do Offsets Have A Place?

GHG Protocol – Scopes of Emissions

Corporate GHG reduction or Green Power commitment

- GPP, Climate Leaders, CCX, GPMDG

Stakeholder Relations - Employees (Timberland, Mohawk Paper) - Customers (Aveda, ClifBar, Stonyfield, GMCR)

Brand Identity (Interface, ClifBar, Ben & Jerry’s,

Stonyfield, GMCR)

STRATEGIC

VALUE

Regulatory Requirement

- EU/CA/RPS

Offsets in Business

Gaining Carbon Market Experience

Enhance Reduction Project ROI vs Offset Costs

U.S. Is Mostly Voluntary Today

VERsERsPERs

Global Compliance Global Voluntary Market

$29.9 B (USD) $91 MM (USD) 2006

Source: State of the Voluntary Carbon Market Ecosystems Marketplace

OTC

13.4 MtCO2-e

10.3 MtCO2-e

U.S. = 68%

CERs – CDM ProjectsERUs – JI ProjectsEUAs - EuropeRGGI – US NortheastAB32 – US CaliforniaNGACs - Australia

Source: State of the Voluntary Carbon Market Ecosystems Marketplace

A Renewable Project May Have RECs and GHG Reductions:

RECs – Renewable Energy Credits – The rights to claim the environmental benefits and marketing rights from a certain quantity (kWh) of renewable electricity produced.

RECs Green power claims

Direct CO2 Reductionse.g. reduced onsite fugitive emissions

[methane abatement]

Direct CO2 Reductionse.g. waste heat recovery

reduces fossil fuel use

What Is a CO2 Offset?

An offset represents an action,

beyond business as usual, that

causes a reduction or the sequestration of CO2

usually via funding of some type of project

Offsets are “Direct” or “Indirect”

“Direct” means that the reductions occur within the project boundary

“Indirect” means that the reductions occur outside the project boundary

Engine-generator burns methane biogas from the digester, and runs round-the-clock. Most systems provide 2x farm needs.

Farm Digesters Produce Methane Gas from Manure

Manure is digested in a closed tank that captures methane gas. Digestion stabilizes the manure, eliminates odor and facilitates spreading for better absorption by crops.

Schrack Farm - LogantonSchrack Farm - Loganton

650 Milkers, 150 heifers will fuel a 165 kW system producing - 1000 MWh/yr

1.RECs CO2 reduction ~ 640 tons/yr

2.Fuel CO2 reduction ~ 105 tons/yr

3.Avoided Lagoon methane ~ 2237 tons CO2e/yr of GHG offsets

Assuming all paid as 20-year, up-front = 15 % of project cost

Type of renewable sourceType of renewable source Consumer and business preference Consumer and business preference

for wind and solar. for wind and solar. Where the source is locatedWhere the source is located

Even for ‘global’ warming offsets, a Even for ‘global’ warming offsets, a project closer to home is more project closer to home is more attractiveattractive

Who owns the source, and are there Who owns the source, and are there social benefitssocial benefits Extra value for non-utility projects, Extra value for non-utility projects,

with local economic benefits such as with local economic benefits such as not-for-profit, farmer and tribal-ownednot-for-profit, farmer and tribal-owned

What Does the Voluntary What Does the Voluntary Market Value?Market Value?

Offsetting Emissions: A Business Brief on the Voluntary Carbon MarketBusiness for Social Responsibility December 2006

Important Quality - AdditionalityImportant Quality - Additionality

Are the REC/offset project revenues Are the REC/offset project revenues needed?needed? Is the project beyond “business as usual” – Is the project beyond “business as usual” –

what is the baseline? what is the baseline? Is the long-term sale of RECs/offsets helpful Is the long-term sale of RECs/offsets helpful

or critical to proceeding with construction?or critical to proceeding with construction?

Does Does my purchasemy purchase of the RECs/offsets of the RECs/offsets make a difference?make a difference?

Discounted Forward Stream Production Volume

Total Volume Retirement in Current Year

ExpectedAnnual Productionof ProposedRenewable Energy Project

Ener

gy P

rodu

ction

- M

Wh

# number years

Average

DiscountedAverage

Discounted Average / Yearx

# number years

=Upfront Payment Provides

Critical Support to Renewable Energy Project

>>

Forward Stream 101Forward Stream 101

04/21/23

Forward –StreamProductionAccounting

Those Who “Helped Build” the Little Alex

Project-Specific AdditionalityProject-Specific Additionality

Four tests: Is the return on project investment (ROI) too low without the offset revenues?

If the ROI is adequate, does the project owner lack access to the capital to make the investment?  

If the ROI is adequate and capital available without offset revenues, are there other technical barriers to implementation?

If ROI is adequate, capital is available, and there are no technical barriers, is the project the first or substantially the first of its kind in the particular market, region or application? 

Existing Pre 1997Existing Pre 1997

Non-additionalNon-additional

REC $$ = gravyREC $$ = gravy

Existing “New” 1997+Existing “New” 1997+

“ “New” = proxy for indirect New” = proxy for indirect additionalityadditionality

REC $$ = often helpfulREC $$ = often helpful

New Planned - ExpectedNew Planned - Expected

Direct additionalityDirect additionality

REC $$ = expected, but has REC $$ = expected, but has tolerance for short-term salestolerance for short-term sales

New Planned - NeededNew Planned - Needed

Direct additionalityDirect additionality

REC $$ = critically needed, has REC $$ = critically needed, has no toleranceno tolerance for short-term for short-term salessales

Pre-1997

“New” 1997+

Planned - expected RECs sales

Planned - needed RECs sales

REC Quality & PriceREC Quality & Price

PR

ICE

QUALITY/VALUE

Quality: RSVPE - Real Surplus Verifiable Permanent Enforceable

Ensuring The Offsets Are RealEnsuring The Offsets Are Real

Schrack Family Farm Loganton, PA

800 Cows

In family since 1776

Penn England Farm Williamsburg, PA

800 cows

In family since 1936

Dovan Farm Berlin, PA

Wanner’s Pride N Joy Narvon, PA

350 Cows

In family since 1900

700 Cows

In family since 1840

2982 tons/yr 2950 tons/yr

1430 tons/yr 2725 tons/yr

Monitoring REC Performance

Certification of RECs and OffsetsCertification of RECs and Offsets A buyer values third-party certification of their A buyer values third-party certification of their

purchase – or knowledge of meeting third-party purchase – or knowledge of meeting third-party standardsstandards

A certified REC does not equate to certified COA certified REC does not equate to certified CO22

offset – changing with Green-e Climate standardoffset – changing with Green-e Climate standard

Certification costs can become material – with Certification costs can become material – with some buyers preferring to put their dollars into some buyers preferring to put their dollars into more RECs or offsetsmore RECs or offsets

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ARSO or OSCARS?ARSO or OSCARS?

A.R.S.OA.R.S.O.. = = AAvoid/void/RReduce/educe/SSubstitute then ubstitute then OOffset what remains. Vision of ffset what remains. Vision of Forum for Forum for the Future , the Future , UK NGOUK NGO

We suggest action to prime the pump:We suggest action to prime the pump:

O.S.C.A.R.SO.S.C.A.R.S = = OOffset/ffset/SStart tart CConversations onversations about how to about how to AAvoid/void/RReduce/educe/SSubstituteubstitute

For more information contact For more information contact NativeNativeEnergy atEnergy at

(800) 924-6826(800) 924-6826

Or visit us on the web atOr visit us on the web at

www.nativeenergy.comwww.nativeenergy.com