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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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September 2007</u></b></p>
<p align="center"><font size="6"><b>Carbon Hazing Alert</b></font></p>
<p><strong>by Roger Feldman --
</strong><b>Andrews Kurth, LLP</b><strong><br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2008/01/26</em>)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
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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.<p>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.</p>
<p>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 <u>Financial Times</u>; “Another Inconvenient
Truth,” sneered <u>Business Week.</p>
</u>
<p>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.</p>
<p>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.<i><b> </b></i>(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.</p>
<p>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.</p>
<p>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>i.e.</i>, 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.<br>
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<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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