1

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 FEDERAL TRADE COMMISSION

2

3

4

5

6

7 CARBON OFFSETS AND RENEWABLE ENERGY CERTIFICATES

8

9

10

11

12

13

14 Tuesday, January 8, 2008

15 9:00 a.m.

16

17

18

19 Federal Trade Commission

20 FTC Conference Center

21 601 New Jersey Avenue, N.W.

22 Washington, D.C.

23

24

25
2

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 TABLE OF CONTENTS

2

3 PAGE

4 Welcoming Remarks by James Kohm......................3

5

6 Opening Remarks by Deborah Platt Majoras.............8

7

8 Introduction to Advertising Law by Lesley Fair.......18

9

10 Session 1: Market Overview - Current Practices for

11 Carbon Offsets and RECs..............................30

12

13 Session 2: Property Rights and Product Development -

14 Economic Analysis.....................................85

15

16 Session 3: Technical Substantiation Issues...........119

17

18 Session 4: Certification Programs and Self-Regulatory

19 Efforts...............................................173 

20

21 Session 5: Roundtable Discussion on Consumer Protection

22 Challenges and Need for FTC Guidance..................203

23

24

25
3

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 P R O C E E D I N G S

2 - - - - -

3 WELCOMING REMARKS

4 MR. KOHM: Good morning and welcome to the

5 Federal Trade Commission's Carbon Offsets and Renewable

6 Energy Certificates Workshop. Before we begin today, I

7 have a couple of announcements. The first is somebody

8 lost a SmartTrip card this morning and it's at the

9 guard's desk out front. So, if anybody can't get home

10 today, that's where you need to go. 

11 Before I begin, a few announcements for

12 panelists and the audience. For those people who are

13 going to be panelists today, please lean into these

14 microphones. They don't pick up sound when you lean back

15 and we have a pretty full house today, and we want to

16 make sure that the people in the back are able to hear

17 you. 

18 We're going to endeavor to stay on time today. 

19 We have a lot of things to do and a very full agenda. 

20 So, if the panelists can please stick strictly to the

21 time limits that have been provided. We want to make

22 sure everybody hears what you say, but we want to also

23 make sure we have time for questions and that we don't

24 crunch the people at the end of the day. 

25 There will be time for questions at the end of
4

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 each panel. In order to ask questions, please fill out

2 the cards that have been provided, the question cards

3 that were provided this morning. If you need additional

4 question cards, they will be in the back of the room. 

5 Simply fill out the card and hold it up, somebody will

6 come by and get the card and bring it to the moderator.

7 We aren't always able to ask everybody's question, but

8 we’d like to make all the questions part of the official

9 record of this event. So if you can please write 

10 legibly. And while we'll take anonymous questions, we

11 would appreciate it if you would write your name and

12 affiliation on the card and we'll actually scan the card

13 and make that part of the record. 

14 If you would like to know what restrictions we

15 place on the use of that information, namely being your

16 name and affiliation, you could visit our website and

17 look at our privacy policy. 

18 The record of this event will remain open until

19 January 25th, so if people want to answer those

20 questions, if you want to supplement your comments, if

21 you hear anything today that you would like to comment 

22 on, we'd encourage everybody to file those comments. In

23 order to do so, you can send paper to the FTC's main

24 address, but we’d prefer if you would comment on the

25 website. Simply go to the FTC website, click on the
5

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 carbon offset button, and follow the instructions. It’s

2 very easy to do. 

3 Today's event is also simultaneously webcast

4 and transcribed, so you'll be able to go to the site and

5 see copies of both the transcription and the webcast that

6 could help you with any further comments. 

7 In making comments, I just remind everybody

8 that today's event is part of a rule-making record which

9 is something a little different for the Federal Trade

10 Commission. So, please keep in mind that what we're

11 looking at is what claims are being made, how those

12 claims are understood by consumers, whether the claims

13 are truthful and substantiated, and what advice the FTC

14 can give to help people avoid making deceptive claims. 

15 Turning to a few housekeeping matters. First,

16 regarding safety and security. Everybody received a name

17 tag when they came in this morning. You need to wear

18 that name tag at all times when you're in the building. 

19 If you see anything suspicious while you're here, if you

20 see somebody walking around at the conference without a

21 name tag, you can tell the guards at the front desk in

22 the lobby. 

23 When you leave the building today, you'll have

24 to come back in through the same security procedures you

25 came in this morning. So, particularly, when you go to
6

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 lunch today, make sure you leave enough time because we

2 will be starting on time to come back through those

3 procedures. 

4 In case of a fire emergency, there are two

5 exits, the main exit is out the main entrance onto New

6 Jersey Avenue. If you go straight back through the

7 pantry, there's also an exit to the left out to G Street. 

8 If we have such an emergency, please leave in an orderly

9 fashion and cross diagonally across New Jersey Avenue. 

10 So you stay far away from the building. 

11 For everyone's enjoyment today, please either

12 turn off your cell phones, your Blackberries or put them

13 on vibrate. We realize it's a long day and everybody

14 can't necessarily be out of touch all day. If you do get

15 a call or you want to make a call, however, please don't

16 do that in this room. Aside from interfering with

17 everybody else's enjoyment, it also interferes with our

18 equipment. So if you want to make a call or you receive

19 a call, please go all the way through the first set of

20 glass doors out into the lobby. 

21 We also have recycling bins, paper, plastic and

22 aluminum right outside in the gallery. There's also a

23 box for unused question cards. We'd encourage everybody

24 to use those. 

25 Finally, for those of you who are going to be
7

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 here all day and who haven't been listening to these

2 announcements just waiting for the first speaker, the

3 next ten seconds is what you want to really listen to. 

4 The bathrooms are across the lobby. If you go to the

5 left of the guard desk and follow the corridor around to

6 the left, you'll find both bathrooms. Okay, that

7 concludes today's announcements. 

8 Turning to our first speaker. Four years ago,

9 one of Chairman Majoras' first duties when she joined the

10 FTC was to open another workshop put on by the

11 Enforcement Division. At that time, my predecessor

12 introduced her as an anti-trust attorney with an inner

13 consumer protection lawyer just waiting to get out. 

14 Today, I'm proud to introduce the preeminent

15 anti-trust and consumer protection attorney, the

16 Chairman of the Federal Trade Commission, Deborah Platt

17 Majoras. 

18 (Applause.)

19

20

21

22

23

24

25
8

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 OPENING REMARKS

2 CHAIRMAN MAJORAS: Well, thank you so very

3 much, Jim. It's terrific to be here. I welcome everyone

4 to Washington and, particularly, our participants in this

5 workshop. I also want to give a special welcome to those

6 joining us by webcast. I must say this is one of our

7 best attended workshops we have had in a while. And, so,

8 together with our webcast participants, I think we're

9 going to have just a tremendous dialogue. So, thank you

10 for being here. 

11 Why are we here? Well, from the sun belt to

12 the rust belt to the beltway, consumers are showing

13 increasing interest in environmental issues and,

14 importantly, this interest may be influencing their

15 purchasing decisions. In a recent USA Today Gallup poll,

16 more than eight in ten Americans said that a company's

17 environmental record should be an important factor in

18 deciding whether to buy its products. 

19 Businesses have taken notice, and in the past

20 year there's been a virtual explosion of green marketing. 

21 NBC devoted an entire week to green programming. The

22 current issue of Good Housekeeping includes a piece of

23 how to buy green and not get fooled. Other magazines

24 like Vanity Fair have released green issues and retailers

25 like Wal-Mart and Home Depot have launched green product
9

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 lines. 

2 In response to this rise in green marketing, we

3 have accelerated our review of the FTC's Green Guides,

4 which were first issued in 1992 and then updated in 1998. 

5 We do a regular review on a schedule of our guides and

6 rules, but this one we have decided we need to do at an

7 accelerated pace. 

8 Now, for some of you here today, this may be

9 your first exposure to the FTC, so let me just tell you a

10 little bit about who we are and what we do. Our two

11 fundamental missions are to promote and safeguard

12 competition and to protect consumers. We're a relatively

13 small agency with about just under 1100 employees, but we

14 not only tackle a wide range of prominent competition but

15 consumer protection issues which we'll focus on today. 

16 From spam to spyware to mortgage fraud, media violence to

17 mobile marketing, data security to debt collection. And,

18 of course, we run the national Do Not Call Registry. 

19 In the advertising realm, our fundamental tool

20 is the FTC Act which prohibits unfair or deceptive trade

21 practices. So, for marketers, the basic rule to remember

22 is that any material misrepresentation, omission or

23 practice is deceptive if it's likely to mislead consumers

24 who are acting reasonably. In short, marketers have to

25 have a reasonable basis to support their advertising
10

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 claims. 

2 Now, our job is not to substitute our judgment

3 for that of consumers or to save them from making bad

4 choices, which unfortunately we all do sometimes. 

5 Rather, it's to ensure that they obtain the truthful

6 information that they need to make their own choices. 

7 And when markets function in this way, consumers win. 

8 They secure a broader selection of innovative products at

9 lower prices. 

10 In fulfilling our mission at the FTC, we employ

11 a variety of tools, including law enforcement, market

12 research, business education, consumer education, and the

13 encouragement of sound, self-regulation in the industrial

14 realm. Over the years, our work in the energy and 

15 environmental fields has underscored this multi-tiered

16 approach. We’ve challenged deceptive practices in court,

17 we’ve published information to help consumers make

18 informed green purchasing decisions, and we’ve

19 promulgated rules and guides to make the rules of road in

20 this area clear for business. We've also encouraged well

21 constructed industry self-regulatory programs as a way to

22 compliment our own government efforts. 

23 The FTC's Green Guides apply the FTC Act to

24 environmental advertising and marketing practices and

25 offer marketers general principles on how to avoid making
11

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 misleading claims. The guides also provide guidance to

2 marketers on specific claims such as what is meant by

3 environmentally friendly, recyclable, compostable. Since

4 the guides were last revised in 1998, of course, the

5 market has experienced the increased use of these terms

6 to promote the green attributes of products, their

7 packaging, their manufacturing processes. But we've also

8 had the introduction, of course, of new terms like

9 sustainable, bio-based, cradle to cradle, and carbon

10 neutral. 

11 Given the dynamic nature of this marketplace,

12 it's important that the guides are responding to today's

13 challenges and to consumer perceptions currently of these

14 environmental claims. After all, consumers today have

15 the option to purchase products and use them in ways that

16 were unforeseen 15 years ago, when we first developed our

17 guides, and consumer perceptions of old green claims may

18 have evolved significantly over time. Our robust review

19 of these guides will allow us to explore emerging

20 consumer protection issues and provide better direction

21 to green marketers. 

22 Now, as is usual in reviewing a rule or guide,

23 the FTC is seeking public comment on the continuing need

24 for the guides, their economic impact, the affect of the

25 guides on the accuracy of various environmental claims,
12

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 and the interaction of the guides with other

2 environmental marketing regulations. 

3 Given the explosion in the role of green

4 marketing, though, we also decided to hold a series of

5 public workshops on emerging green marketing issues. 

6 What we have found is that holding these types of

7 workshops, and we do it on a whole variety of issues

8 within our jurisdiction, provides us with an effective

9 and very open way to take in and test the perspectives of

10 various experts and stakeholders in these areas. 

11 Today's event, the first in a series, focuses

12 on carbon offsets and renewable energy certificates, or

13 RECs, which are among the new products not addressed

14 specifically today by the Green Guides. Carbon offsets

15 and RECs are separate yet closely related products in

16 this marketplace and, as many of you know, I'm quite

17 certain, carbon offsets which are available now for

18 purchase frequently serve as the basis for claims that

19 greenhouse gas emissions are reduced. The offsets are

20 memorialized in credits or certificates that purportedly

21 represent measurable reductions in greenhouse emissions 

22 accomplished through such activities as methane capturing

23 or tree planting. 

24 RECs, on the other hand, serve as a new means

25 to market renewable energy. RECs represent the renewable
13

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 attributes of electricity from wind, solar and other

2 renewable energy sources and are sold separately from the

3 electricity produced. As is the case with carbon

4 offsets, companies and individuals can purchase RECs to

5 offset emissions associated with their own activities. 

6 In an effort to become carbon neutral, many purchasers

7 seek to obtain enough offsets to match their own

8 emissions. 

9 The term “carbon neutral” has received a lot of

10 attention. Indeed, early last year, the new Oxford

11 American Dictionary added the word “carbon neutral”

12 having named it the 2006 word of the year. I didn't know

13 such a thing existed. Last year, consumers watched a

14 carbon neutral Superbowl, Academy Awards telecast, and

15 NASCAR race. 

16 Interest in carbon offsets and RECs, however,

17 has not been limited to football fans, Oscar winners and

18 racing enthusiasts. According to a recent Business Week

19 article, the market for carbon offsets in the U.S. could

20 be as high as $100 million, and the New York Times

21 reported that the number of offsets sold by online

22 realtors grew by more than 42 percent from 2005 to 2006

23 and continued to grow at a steep rate during 2007. The

24 sale of carbon offsets and RECs, if marketed truthfully,

25 can provide interested consumers the opportunity to
14

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 participate in this market for products and services that

2 may reduce emissions. 

3 To explore the consumer protection issues

4 raised by this emerging market, throughout the day,

5 experts from environmental organizations, industry,

6 government and academia will address the technical and

7 marketing issues posed by carbon offsets and RECs. These

8 experts will discuss a wide range of issues related to

9 these products, including efforts by a variety of

10 organizations in the U.S. and internationally to develop

11 methods for substantiating these claims, as well as

12 discussing new and ongoing self-regulatory and

13 certification efforts. 

14 We hope that our discussions today can play an

15 important role in furthering our collective understanding

16 of the challenges that are presented here, and let me

17 throw out a couple that we see. 

18 For example, unlike tangible goods like cars or

19 breakfast cereal, carbon offsets and RECs don't offer

20 consumers an easy way to verify that they’re receiving

21 the product for which they paid. Many of the products

22 funded by the sale of RECs or carbon offsets occur in

23 places remote from consumers, whether the activity is 

24 planting trees in another country or subsidizing wind25 powered energy across the U.S. Moreover, even if
15

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 consumers could see the project in action, most of us

2 would have great difficulty in confirming that our offset

3 purchase actually funds that particular project, or that

4 the project would not have happened without our purchase,

5 or for that matter that the project actually reduces

6 atmospheric carbon in the amount that’s claimed. Simply

7 put, with this much uncertainty, there's a heightened

8 potential for deception.

9 In addition, these new products raise questions

10 of consumer interpretations. So, for example, when

11 consumers buy offsets, do they know what they're 

12 purchasing? How do they interpret express claims about

13 the general environmental benefits of the products and

14 what implied claims are consumers taking away from this

15 marketing? And, of course, substantiating claims may

16 pose challenges for marketers. 

17 Marketers first have to ensure that both the

18 express and implied claims are based on competent and

19 reliable evidence. If you say that your product offsets

20 a certain amount of atmospheric carbon, then it should do

21 just that. Additionally, even when the science is sound,

22 other substantiation issues may arise. For example,

23 sales of offsets and RECs may involve multiple

24 transactions in a variety of different entities, and

25 inadequate tracking and verification systems could lead
16

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 even those sellers acting in good faith to inadvertently

2 sell the same product more than once. Unfortunately,

3 these realities could also create opportunities for bad

4 actors to deceive consumers. 

5 So, today, we're going to explore these and

6 other issues to determine the best way for the FTC to

7 protect consumers in these burgeoning markets. A deeper

8 understanding not only would help us combat fraud in the

9 future, but will help us provide better guidance to

10 marketers seeking to make truthful claims and also to

11 provide guidance to consumers in making purchasing

12 decisions. 

13 Consistent with our past efforts on green

14 matters, though, I want to make clear that we don't plan

15 to develop environmental performance standards. We don't

16 have the authority or the technical expertise to address

17 issues of environmental or energy regulation, per se. 

18 Nor are we in the business of mandating environmentally

19 preferable practices. Instead, our efforts will focus on

20 our traditional consumer protection role addressing

21 deceptive and unfair practices under the FTC Act. And as

22 part of this effort, we are seeking to determine whether

23 additional FTC guidance is warranted and, if so, what

24 that guidance should be. 

25 We have an impressive group assembled here
17

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 today, so I am confident that we are all going to leave

2 better informed than when we arrived. So, again, I want

3 to thank you for your interest and participation in these

4 very important issues, and my special thanks to the

5 panelists for taking time to lend us your expertise. 

6 Have a good day. Thank you. 

7 (Applause.)

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25
18

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 INTRODUCTION TO ADVERTISING LAW

2 MR. KOHM: We'd like to invite the first panel

3 up. 

4 For those of you in the back of the room, I

5 think there's seats over here if you want to come grab

6 those now. There's also some seats in the front row over

7 to the left. 

8 MS. FAIR: Good morning, I'm Lesley Fair, I’m

9 an attorney in the Bureau of Consumer Protection working

10 in our Division of Consumer and Business Education. I

11 have the relatively simple job today of explaining the

12 93-year history of FTC law enforcement in now 14 minutes

13 and 30 seconds, so hold on. For those of you who are FTC

14 regulars, this will be a review, but I hope we can give,

15 at least, some basic information. 

16 Let me also mention, on a sticky note that I

17 can assure you is made from 100 percent recycled

18 materials, that the opinions I am going to be expressing

19 today, as well as FTC staff at this event, are mine alone

20 and don't necessarily reflect the official position of

21 the Federal Trade Commission. 

22 For those who are used to dealing with the

23 regulatory frameworks of other agencies, the FTC offers,

24 I think, a different and a streamlined approach. 

25 Certainly, we have, in our relatively thin volume in the
19

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Code of Federal Regulations, a few regulations that will

2 apply across the board regardless of the nature of the

3 product or service you're selling. For example, the Mail

4 Order Rule would require that if you're selling products

5 via let's say a catalog, online, anywhere through the

6 mail, that you deliver your products in the requisite

7 length of time regardless of what the nature of the

8 product is. 

9 Anyone who uses email marketing as part of

10 their campaign will need to follow the requirements of

11 the Can-Spam Act to offer consumers an easy way to opt

12 out of receiving future email. So, those kinds of rules

13 apply across the board regardless of the nature of the

14 product or service that you may be selling. 

15 The FTC also has a limited number of specific

16 rules and guides related to certain industries. 

17 Certainly, things like the Used Car Rule or the Appliance

18 Labeling Rule, the Green Guides, as the Chairman

19 mentioned, one of the ones that are probably of most

20 interest to the folks that we’re going to be talking

21 about today. 

22 However, the real basic of where the Federal

23 Trade Commission's law enforcement approach begins is

24 Section 5 of the FTC Act, which I think is 23 words long,

25 last I counted it, has really not changed in the 93-year
20

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 history of the agency, and here is what it says. “Unfair

2 methods of competition in or affecting commerce and

3 unfair or deceptive acts or practices in or affecting

4 commerce are hereby declared unlawful.”

5 The vast majority of what the FTC does in the

6 law enforcement arena is based on enforcing this 23-word

7 statute. So, if you are looking in our law for specific

8 case law dealing with carbon offsets or specific case law

9 dealing with RECs, you're not likely going to find them. 

10 What you'll find instead is the FTC's approach under

11 Section 5 of the FTC Act. 

12 Let me call your attention to two very

13 important words, as the Chairman mentioned, deceptive

14 acts or practices and unfair acts or practices. These

15 words have very specific meanings under our law. 

16 So, when is an act or a practice deceptive

17 under the FTC Act? To find out more about this, you'll

18 want to look at the FTC's Deception Policy Statement

19 which applies across the board to all products and

20 services and is readily available at FTC.gov, but here is

21 the summary. An act or practice is deceptive under the

22 FTC Act if it contains a representation or an omission of

23 information that would be material to consumers,

24 important to their decision to buy or use the product,

25 and that would mislead consumers acting reasonably under
21

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the circumstances. That's about 95 percent of the legal

2 theory that the FTC uses when we challenge a false or

3 deceptive advertising in the marketplace. 

4 What is an unfair act or practice under the FTC

5 Act? If it's likely to cause substantial consumer 

6 injury, that could be physical or economic, not

7 reasonably avoidable by consumers themselves, and not

8 outweighed by benefits to consumers or competition. 

9 You'll find more about this in the FTC's unfairness

10 policy statement. Portions of this have actually been

11 incorporated into the FTC Act itself. That makes up

12 about 5 percent, but an important 5 percent, of what the

13 FTC does in law enforcement actions to protect consumers. 

14 These same standards apply across the board to

15 all products and services. These same standards also

16 apply across the board, regardless of the advertising

17 medium that a company may use to disseminate its claims. 

18 Bearing in mind from the FTC's point of view, too, things

19 that a company says on its website about its products or

20 services are ads in the same way that a million dollar

21 buy for 15 seconds of a carbon neutral Superbowl are ads. 

22 So, it’s important to bear in mind that your slogans,

23 your trade names, as well as what you might say in a

24 newspaper or radio ad or online are all ads subject to

25 the Federal Trade Commission Act. 
22

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Here are just four basic principles that I

2 think guide the FTC's view of how to enforce those 23

3 words to protect consumers the best. First, that the FTC

4 looks at advertising claims from the point of view of

5 reasonable consumers. Now, I'm not asking for a show of

6 hands, but remember, reasonable consumers don't have your

7 expertise in the technical areas that may be involved

8 here. Some of them may have actually flunked organic

9 chemistry at some point in their life. What you're

10 looking for is a reasonable member of your target market

11 and that may well be an average Joe or Josephine American

12 on the street, how they interpret the claims. So, it's

13 not how the advertiser or scientist or technical experts

14 interpret the claims, it's how reasonable consumers do

15 it. 

16 The basic principle that companies need to

17 remember is that before running an ad, the advertiser

18 must have substantiation for all claims, that’s express

19 and implied claims, that those reasonable consumers would

20 take away from the ad. Now, again, the issue is not what

21 claims did the advertiser intend to convey. That's not

22 how the FTC looks at it. It's what claims reasonable

23 consumers take from the ad. So, it's important to bear

24 in mind not just what an advertiser may intend to

25 communicate, but how real-life consumers are actually
23

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 interpreting these claims. Obviously, the level of

2 substantiation is going to depend on the nature of the

3 claim as I'll show in an example in just a minute. 

4 Third, if a claim is truthful only under

5 certain limited circumstances, advertisers must take care

6 to qualify that claim and to do that carefully. General

7 environmental claims that may actually need careful

8 qualification is another topic I think that advertisers

9 are going to want to pay particular attention to. I'll

10 show a hypothetical example. 

11 Finally, if a disclosure is necessary to

12 prevent an ad from being deceptive, it must be clear and

13 conspicuous. Simply put, what the headline giveth the

14 footnote cannot taketh away. That applies across the

15 board regardless of the nature of the product. 

16 To show how these four principles work, the two

17 questions that the advertisers must ask themselves before

18 running an ad -- and, yes, the substantiation requirement

19 requires that the company possess this reasonable basis

20 before disseminating the claims. 

21 First, what claims, express and implied, does

22 my ad convey to reasonable consumers? And, second, do I

23 have competent and reliable evidence which, depending on

24 the claim, may require scientific evidence to support

25 each of those claims? 
24

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Let me walk through this using just a

2 hypothetical I came up with. I call this product

3 LumaGreen energy frugal light bulbs. At least as of ten

4 days ago, I spent quite an amount of time on the Patent

5 and Trademark website trying every cognate of eco, earth,

6 green and enviro. I think this is the only thing that

7 hasn’t been taken yet and, again, it's up for grabs if

8 anybody wants to, but LumaGreen energy frugal light

9 bulbs. And, as I said, this is strictly a hypothetical

10 not based on an actual product. 

11 Let's take a look at the kinds of claims you're

12 likely to see in an ad like this. First, replace your

13 current 100-watt bulbs with LumaGreen energy frugal

14 lights and bathe your home in the natural glow of the

15 sun. The concern here -- let's say I told you that the

16 LumaGreen bulbs only provided 65 watts of light. From

17 the FTC's point of view, we would be very concerned that

18 consumers would be left with the impression that they

19 would be getting 100 watts of light from the LumaGreen

20 energy frugal lights. So, there would be a concern about

21 what kind of express or implied claim consumers are

22 taking from the ad. 

23 Now, the fact that the company did not

24 literally say, you'll get 100 watts of light, does not

25 mean that that claim doesn't have to be substantiated. 
25

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 So, here is an example of where we're going try to find

2 out how consumers interpret that claim. Do consumers

3 understand that claim that they're going to be getting

4 the equivalent of 100-watt bulbs? So, that explains that

5 we look at these claims from the point of view of

6 reasonable consumers. 

7 The second basic proposition, again, to

8 substantiate all claims, express and implied, that

9 reasonable consumers take from the ad. For each 100-watt

10 bulb you replace with a LumaGreen energy frugal light,

11 you'll save $28 a year on your electric bill. Not an

12 unusual claim, the kind of thing we see a lot. Those

13 kinds of claims -- generally speaking, claims must be

14 substantiated with competent and reliable evidence. 

15 Claims about the benefits, efficacy, health, safety, or

16 similar objective product representations, they're going

17 to need competent and reliable scientific evidence. 

18 How does the FTC define that? We look at

19 competent and reliable scientific evidence as

20 methodologically sound tests, studies, scientific

21 research, based on the expertise of professionals in the

22 field, objectively conducted by qualified people, using

23 procedures accepted as accurate, yielding statistically

24 significant results. So, we're talking solid science 

25 here. 
26

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Maybe it's helpful to talk about what competent

2 and reliable scientific evidence is not. It's not

3 anecdotal evidence from consumers. The fact that

4 consumers like the product is lovely and we hope that

5 happens, but that is not the same as competent and

6 reliable evidence. 

7 Popular press articles, you know, Vogue

8 Magazine is not the New England Journal of Medicine, in a

9 different kind of context. If you're making scientific 

10 claims, popular press articles or newspaper reports

11 aren't going to stand up. 

12 Sales materials from the person who sold you

13 the active ingredients or the underlying products are not

14 going to be substantiation simply because they, too, have

15 a motivation to sell you something

16 The fact that there's a low return rate, again,

17 a nice thing but does not prove, does not substitute for

18 competent and reliable scientific evidence, neither does

19 the fact that a company may offer a money back guarantee. 

20 Certainly, a money back guarantee gives rise to the need

21 to honor that guarantee, but, again, it does not

22 substitute for competent and reliable scientific

23 evidence. 

24 So, in looking at a claim like this, the FTC is

25 going to try to figure out, you know, that $28 claim is
27

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 going to depend on a lot of different things. What's the

2 cost of electricity in different parts of the country?

3 How is the product used? Is this on a 24-hour a day 

4 lightbulb or on a lamp that’s flicked on for just a few

5 minutes a day? So, all those variables companies need to

6 bear in mind when trying to come up with the adequate

7 level of substantiation for making these claims. But

8 what companies definitely need for objective product

9 claims is competent and reliable scientific evidence that

10 they're truthful. 

11 Here is another claim. At only $2.99,

12 LumaGreen energy frugal lights are a bright idea. I

13 always say if -- the deal I would like to make is if 

14 marketers and lawyers stop using asterisks, I will do

15 what I can to get the government to stop using asterisks. 

16 But here, just hypothetically speaking, you'll notice the

17 asterisk after the $2.99. At the bottom of the ad, in

18 four-point type, is this phrase. Special introductory

19 unit price with online purchase of 144-light case, for

20 more information go to the website. 

21 The FTC would likely say, you know, it

22 certainly would be from a staff perspective that that

23 would be an ineffective disclosure because it did not

24 clearly and conspicuously disclose what the true price

25 is. So, it’s those kinds of considerations that the FTC
28

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 is going to look at, again, what the headline giveth the

2 footnote cannot taketh away. 

3 I have gone back 58 years in FTC juris prudence

4 and, to my knowledge, the Commission has never lost a

5 case when the company's defense was, but we disclosed it

6 in a footnote or on a television superscript. So just to

7 let you know how that works. 

8 Finally, the kind of claim that a lot of times

9 we all see in these save the earth, earth-friendly,

10 general claims -- bear in mind that it’s going to be

11 important how consumers interpret those representations. 

12 It's probably, I would suggest, unwise to try to get

13 around the substantiation requirement simply by using

14 what I would call the green buzz word du jour. Remember

15 that slogans like this may well convey information and

16 convey claims to consumers. 

17 Let's say, hypothetically speaking, that the

18 filament of my magnificent LumaGreen energy frugal

19 lightbulb, unlike other products, is made from the

20 dreaded element Washingtonium, I'm calling it. 

21 Certainly, companies would have to be careful about

22 making these general, unqualified save-the-earth kinds of

23 claims when there are mitigating factors or factors

24 outweighing it that raise other concerns about the safety

25 or benefits of the product. So, again, I think these are
29

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 things advertisers need to watch out for in using these

2 general slogan-type statements in their ads. 

3 Now, where can companies go for more

4 information about how the FTC looks at advertising

5 claims? Certainly, in the back of the room today, you

6 have the business guidance piece, Complying with the

7 Environmental Marketing Guides, I think a very useful

8 source of information. You'll also find little copies of

9 our FTC Business Briefcase, which include 68 of the most

10 popular plain language business guidance documents,

11 including complying with the environmental marketing

12 guides to give you a little bit more information about

13 how the FTC looks at these kinds of advertising claims. 

14 I'm 15 seconds over, but there you have it. 

15 Thank you very much. 

16 (Applause.)

17

18

19

20

21

22

23

24

25
30

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 SESSION 1: MARKET OVERVIEW - CURRENT PRACTICES 

2 FOR CARBON OFFSETS AND RECs

3 MS. HANN: Lesley, thank you for an informative

4 and, as always, dynamic presentation. 

5 Good morning, everyone, and welcome to session

6 one. Market Overview: Current Practices for Carbon

7 Offsets and Renewable Energy Certificates. My name is

8 Carolyn Hann. I am an attorney in the Enforcement

9 Division of the Bureau of Consumer Protection, and I will

10 serve as the moderator for this session. 

11 I would like to introduce our distinguished

12 panel. First, we have Kate Hamilton, who is the Carbon

13 Project Manager at Ecosystem Marketplace. Next is Lori

14 Bird, a Senior Energy Analyst with the National Renewable

15 Energy Laboratory, or NREL. Our third panelist is

16 Rebecca Tushnet, Professor of Law at the Georgetown

17 University Law Center. And, finally, Alan Levy, a Senior

18 Scientist at the Food and Drug Administration. 

19 This session will provide an overview of four

20 discrete areas, all of which will lay the groundwork for

21 today's workshop. First, Kate Hamilton will present an

22 introduction to the carbon offsets market. She will be

23 followed by Lori Bird who will provide an overview of the

24 renewable energy certificates market. Next, we will turn

25 to Rebecca Tushnet who will cover First Amendment and
31

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 commercial speech issues. Finally, Alan Levy will

2 discuss consumer perception in new markets such as these. 

3 And, now, Kate will start us off. 

4 MS. HAMILTON: Thank you for the introduction,

5 Carolyn, and thank you all for being here. I know that

6 carbon offsets and coffee are always a good first of the

7 morning to get my day started right.

8 Before we delve into some of the deeper

9 questions around these markets, I was asked to introduce

10 the carbon markets in general, and particularly, the

11 voluntary carbon markets. 

12 I come from an organization called Ecosystem

13 Marketplace. We're a non-profit, but we were created to

14 be sort of a Bloomberg for these emerging payment for

15 environmental service markets. So, we look not only at

16 carbon markets, but also other environmental markets such

17 as wetlands banking or water quality markets. And I

18 focus on the carbon markets. 

19 So, a few key principles enable these markets

20 to happen, and one is the fact that greenhouse gases

21 circulate evenly around the earth, so that the climate

22 doesn’t care whether I’ve emitted my greenhouses gases in

23 New Jersey or in China. This enables us to find sort of

24 the biggest emission reduction bang for our buck when

25 we’re looking around the earth and how are we going to
32

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 reduce these emissions. So, from an environmental

2 position, this can enable us to reduce as many emissions

3 as we can afford, or from an economic perspective, this

4 could allow us to reduce the same amount of emissions at

5 a cheaper cost. 

6 So, then the idea with offsets is that an

7 entity decides they want to balance out their emissions

8 by paying someone else to reduce or sequester or

9 discontinue their own emissions, and, in theory, the

10 second entity would be doing this at a lesser cost than

11 the first entity. Otherwise, the first entity wouldn't

12 need to offset. 

13 A second big principle about this market is

14 then it puts a price on greenhouse gas emissions and

15 releasing greenhouse gas emissions, and once companies

16 realize there's an additional cost to releasing these

17 emissions, they're more likely to try to reduce these

18 emissions. So, even if you're voluntarily offsetting,

19 then you're still paying for the emissions that you are

20 offsetting and may want to think about ways to reduce

21 them. 

22 Another big issue is this idea that reducing

23 emissions can have other social or environmental

24 co-benefits. There's also a lot of discussions in that

25 if you're only focused on reducing or sequestering
33

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 greenhouse gas emissions, you may be sacrificing other

2 environmental or social concerns. 

3 So, this is a not-to-scale model of some of the

4 markets of the carbon markets. And a big point that I

5 wanted to focus on is that, while today we’re talking

6 about the voluntary carbon markets, they aren’t the only

7 carbon markets. So, these blue bubbles and the green

8 bubble, in fact, are regulated markets. 

9 I’m particularly focused on the two yellow

10 bubbles, and I have broken them into two parts. One is

11 the Chicago Climate Exchange and the other is what I call

12 the over-the-counter voluntary carbon market. The

13 Chicago Climate Exchange is sort of an organized bubble

14 amidst the chaos of the over-the-counter voluntary carbon

15 market. And the Chicago Climate Exchange is a cap and

16 trade system. Members commit voluntarily to reduce their

17 emissions at 6 percent by 2010. And then they can trade

18 emissions or they can also purchase offsets in order to

19 reach their goals. 

20 But those entities define offsets who are not

21 members of the Chicago Climate Exchange, such as

22 individuals and a range of institutions purchasing carbon

23 offsets, are doing this through sort of the more chaotic

24 over-the-counter voluntary carbon markets, and these

25 markets don't have a formal exchange and they simply
34

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 consist of a scattered range of transactions. Because

2 there's not a cap and trade system, they're all offset

3 credits. A lot of people have called this market the

4 wild west or have considered it a buyer beware market.

5 So, a lot of negative plans we'll be talking about today

6 are in this context. 

7 On the flip side, there's some exciting aspects

8 of this market as well. It represents the consumer

9 demand for carbon offsets, sort of consumers looking so

10 how can they maximize their emissions reduction. It also

11 is an arena where sort of new projects can get financed

12 that might not be able to jump through the hurdles of the

13 regulatory markets, sort of the bureaucratic hurdles. 

14 Then it's also a place where maybe smaller projects that

15 can't afford to jump through bureaucratic hurdles can be

16 financed. 

17 This market has been so chaotic that no one

18 really knew exactly even how big this market was, the

19 over-the-counter market or what were the range of project

20 types. So, last year, Ecosystem Marketplace decided to

21 start tracking this market and we did this by trying to

22 survey as many suppliers as we could find and who would

23 help us by sharing information in the marketplace. And

24 what we found is, not surprisingly, the market grew

25 rapidly between 2005 and 2006. So, the green and the
35

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 blue are, in fact, the OTC market and the bronze is the

2 CC market. 

3 Another interesting part about the market,

4 that’s why I broke out the green and blue, is that a huge

5 percent of the OTC market historically was conservation

6 organizations using carbon finance for land conservation,

7 so NOGS. And you can see as the markets matured in the

8 past several years, it’s also become more diversified. 

9 Also, if you look at the pre-2002 column,

10 another interesting point is that this market has been

11 robust for far longer than 2002 to 2006. We also just

12 had a column where we asked how many credits have you

13 sold before 2002. That's why this is so large because it

14 represents 2002 and whatever before that. The earliest

15 transaction we found was in 1989. 

16 Another interesting point, not surprisingly,

17 the suppliers in this market have continued to grow. So,

18 more and more suppliers are coming into this marketplace

19 each year. And I can guarantee you we don't have the

20 numbers for 2007 yet, but in 2007 there's going to be

21 continual growth of new suppliers. I find new suppliers

22 every week that are selling credits in this marketplace. 

23 These suppliers include not only the retailers that you

24 see selling credits on line, but also a host of other

25 different organizations in the supply chain. So, there
36

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 are project developers who may sell to the retailer,

2 there are brokers who may facilitate that transaction,

3 and then there are organizations I call wholesalers that

4 may work with project developers but only sell in bulk. 

5 So, they won’t sell to individuals. They only sell to

6 companies or to other retailers. 

7 So, we also ask these suppliers how big do you

8 think the market is going to be? So, of course, there's

9 a selection bias here because these are the answers of

10 the suppliers in the marketplace, but all the suppliers,

11 most of them predicted continued growth. So, on average,

12 in the next five years, they thought that it could

13 continue to multiply to about four times its size. But

14 with this continued growth and all this excitement around

15 the marketplace, again, I want to point out just how tiny

16 this carbon offset market is, this voluntary carbon

17 offset is compared to the regulated market. 

18 So, with the Chicago Climate Exchange and the

19 OTC together we valued at around $91 million, which is

20 pretty conservative. But all the regulated markets

21 together were valued in 2006 at over $30 billion

22 together. So, again, still a very small market in

23 context of the other markets. 

24 Another interesting point is that a carbon

25 credit is a commodity that's been created from a wide
37

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 range of different projects and this can include a

2 forestry project to something like destroying industrial

3 gas to trapping and flaring methane to renewable energy

4 credits to emissions reductions by energy efficiency, to

5 trapping and flaring methane, et cetera. So, there's a

6 range of different projects out there that are converting

7 themselves to carbon credits. 

8 And in this marketplace, in the OTC market, we

9 found that forestry was 37 percent of the credits sold

10 and that industrial gas, which is actually quite cheap,

11 was another major part of the credits sold. And Lori

12 will get more into renewable energy credits, but only in

13 17 percent of this market are actually renewable energy

14 credits advertised and sold as carbon offset credits. 

15 On the other side is the Chicago Climate

16 Exchange, and these aren’t actually credits sold, they

17 are credits registered. I couldn’t get the credits sold

18 from them. But soil carbon is a huge part of the type of

19 credits registered in them, which means it's been -- for

20 something like Note, they said that the carbon has

21 sequestered in the soil. And it will be interesting to

22 see how well the market evolves, how the sort of balance

23 of different project types change. 

24 So, who is buying these credits? There's talk

25 about the voluntary market, but in the end, you need a
38

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 final buyer to make the market happen. Not surprisingly,

2 the suppliers said that 88 percent of their customers

3 were businesses, and most of these businesses were

4 located in the U.S. So, 68 percent of the consumers we

5 were able to track were in the US. So, the U.S. is very

6 important to this voluntary carbon market. 

7 We also asked suppliers what they thought their

8 customers cared about when purchasing credits, and a few 

9 interesting points came out. One was that the biggest

10 thing was this concept of additionality and the idea that

11 the project would have not happened without the carbon 

12 market. 

13 Another big issue was that they thought their

14 customers wanted additional environmental and social 

15 co-benefits. So, they didn't want a project that just

16 reduced greenhouse gases. They also wanted it to have

17 other co-benefits. So, we called this a demand for

18 charismatic carbon. It’s not just a ton of carbon, it’s

19 sort of a little more exciting, a little more sexy. 

20 Then the fourth point is that they thought

21 their customers really wanted certified credits. I think

22 that this interest on additionality and this interest on

23 certification has become especially large in the past two

24 years as there's been quite a few exposés on this market

25 and quite a few mainstream articles and different
39

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 organizations focus on some of the problems in this

2 marketplace. 

3 Some of the big problems are, one, are these

4 credits additional? Two, could these credits be double

5 counted? How do I know if I haven't sold my credit to

6 one person I'm not selling again to another person? How

7 do I know that I’ve actually sold one credit and then

8 retired it? And, then, also, how do I know that if I’ve

9 sold credits from a project, the project has actually

10 produced those credits and there's been no project

11 failure? 

12 Another issue has been this idea of are there

13 environmental or social sacrifices due to my emissions

14 reduction project? So, some of these articles have

15 focused on these various issues. Then as suppliers and

16 buyers are seeking to prove the legitimacy of this

17 market, certification has been a big issue in the past

18 two years and a range of certifications have popped out

19 in the marketplace. These are a few of them. It's

20 interesting because the certifications are not only for

21 carbon credits, but some of them are actually for

22 retailers themselves or for products that are making

23 carbon credit claims. So, gold standard in CCB’s climate

24 community and biodiversity are some that look at not only

25 the fact that a carbon credit has been reduced, but also
40

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 that it has social and environmental co-benefits. 

2 Other standards, such as a voluntary carbon

3 standard, just want to say that this is a carbon credit

4 and the emissions reduction has been reduced. And last

5 year, in 2006, we found that most retailers actually use

6 their own standards and then the next biggest one was

7 that they use a voluntary carbon standard. I think this

8 will change as standards mature and more people accept

9 them into the market. 

10 So, I think standards have blazed the way for

11 sort of one area of legitimacy in the marketplace. I

12 think the next area that’s coming up now is this concept

13 of registries. Again, this is really important for

14 double counting. So, when you have a credit, can your

15 credit be put in a bank with a serial number where it’s

16 organized and we can watch its transaction happening. 

17 And, now, several registries have popped up this year as

18 well. And I won't go through these registries carefully

19 for the sake of time, but another important aspect of the

20 marketplace. 

21 So, what is going to happen in the next steps? 

22 I think one of the big parts is that there's been

23 continued growth in 2007. I haven't collected the

24 numbers for the OTC market yet for 2007, but I can assure

25 you that the numbers will be at least twice the size as
41

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 in 2006. And, also, the Chicago Climate Exchange

2 reported that their volumes doubled between 2006 and

3 2007. And because the U.S. is such a big source of

4 demand for this marketplace, a big question in the market

5 is if U.S. regulation comes into place, how will this

6 influence the voluntary carbon markets? Will it even be

7 necessary to have a voluntary carbon market? 

8 I think in response to that question there's

9 still a huge number of entities making long-term

10 commitments to purchasing offsets and emissions

11 reductions that probably wouldn't be regulated if

12 regulation came into play. So, the Yahoos, Googles, the

13 Patagonias, et cetera, are all still utilizing offsets. 

14 So, there’s our introduction, and if have any

15 questions, here is my information. 

16 (Applause.)

17 MS. HANN: As Loris’s setting up, I just want

18 to make a quick announcement. The flashing light in the

19 back of the room is not an alarm and there’s no cause for

20 concern, it's just a bad bulb. So, we are working on

21 getting it fixed. Just want to let you know. Thank you. 

22 UNIDENTIFIED MALE: We’re trying to find a

23 LumaGreen bulb for that.

24 MS. BIRD: So, I’m going to try to give a sort

25 of complimentary overview of renewable energy certificate
42

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 markets, just as Kate gave us on carbon offset markets. 

2 I guess I would just say that REC markets are -- you can

3 consider them a subset of carbon offset markets, but some

4 RECs are also purchased for the environmental and other

5 benefits of renewables so they may not be sold as

6 offsets, and there are other emissions benefits of

7 renewables and other social benefits as well. 

8 So, what is a REC? We talked earlier -- one of

9 the speakers mentioned that a REC represents the

10 attributes of renewable energy generation that can have

11 values separate from commodity electricity. So,

12 basically, you can generate electricity from renewable

13 energy sources and that can be sold separately, you can

14 sell the commodity electricity in one place and sell

15 renewable energy attributes somewhere else. There has

16 been some debate about the definition of a REC because

17 some folks would argue that a REC simply represents proof

18 that renewable energy has been generated. 

19 RECs are also known by a number of other names,

20 including green tags, renewable energy credits, tradeable

21 renewable energy certificates and so forth. 

22 A brief history of how RECs evolved and where

23 they started. Primarily, RECs emerged out of discussions

24 about how to implement renewable energy policies. The

25 first mention of this concept was in the mid-1990s when
43

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 California was talking about developing a renewable

2 portfolio standard, which was a policy that requires

3 electricity suppliers or utilities to obtain renewable

4 energy for a certain percentage of the electricity that

5 they are providing to their customers. 

6 Then, after that, it was also marketed when

7 competitive retail electric markets opened up in the late

8 1990s. There was a product called ReGen that was

9 marketed in Massachusetts that was an upgrade service to

10 electricity service. And then in the California market,

11 as well, this concept emerged. And it also emerged in

12 Europe at about the same time. 

13 Why RECs? Why did this emerge? What are the

14 advantages? Basically, this is a mechanism for

15 monetizing the value of the attributes of renewable

16 energy separate from the commodity electricity. It can

17 help eliminate the problems of intermittency. Some

18 renewable energy sources like wind or solar don't operate

19 all the time, the wind has to be blowing for them to be

20 creating electricity. And RECs sort of eliminate that

21 issue that they can be sold separate from the

22 electricity. You don't have to match the consumer's load

23 exactly and so forth. So, it’s a lot easier on the

24 renewable energy side to sell that attribute separately. 

25 Same thing for transmission constraints. 
44

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Sometimes to actually get the electricity to the end use

2 consumer you may have to cross several different

3 transmission lines and so forth. Instead of paying the

4 cost to wheel that there, RECs can avoid that issue as

5 well. 

6 I guess another benefit is that consumers can

7 support renewable energy even if their supplier or their

8 utility or their electricity supplier doesn't offer a

9 renewable energy option. This is something that any

10 consumer anywhere in the U.S. could purchase online. 

11 So, I guess as I’ve already alluded to, REC

12 markets have emerged, there's basically two types of REC

13 markets, two categories that we've come up with. One is

14 the compliance markets, renewable portfolio standards. 

15 These states that have policies that say a certain amount

16 of renewables have to be in the resource portfolio of the

17 utilities or the electricity load serving entities and

18 then voluntary markets are consumers, either businesses

19 or residential consumers, that are voluntarily purchasing

20 renewable energy equivalent to their own electricity

21 consumption. That's a lot of what we're talking about

22 here and that’s what I’m going to focus on, but I am

23 going to just give you a real brief overview of the

24 compliance market side as well. 

25 This map just show the states. Twenty-five
45

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 states now and Washington D.C. have these renewable

2 portfolio standard policies in place requiring the

3 utilities to obtain 20 percent of their electricity from

4 renewable sources by 2020 or so forth. All the amounts

5 differ as you can see. But there's been a real increase

6 in interested states in adopting these policies. A lot

7 of states have increased the amount of renewables that

8 have to be obtained in recent years and quite a few

9 states have adopted policies. It's been growing very,

10 very rapidly. 

11 And on the voluntary market side, which is

12 really what I'm going to focus on and talk about for the

13 rest of the presentation, that market has also been

14 growing rapidly. Today about 25 percent of U.S.

15 utilities offer a green power program. So, that can

16 either be in regulated markets, you know, your utility

17 might be offering it. In the northeast and some other 

18 areas of the country, there's retail competition in

19 electric markets and, so, in some of those states you can

20 either switch providers to purchase green power or --

21 when I use the term “green power” I'm really referring to

22 consumers that are purchasing renewable energy that may

23 be in the form of RECs or it may be in the form of actual

24 electricity bundled with a REC or renewable energy

25 electricity. 
46

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 So, in competitive retail electric markets,

2 consumers, in many cases, have the option to switch to a

3 provider that will offer a green power option or

4 sometimes the default supplier, this is the case in New

5 England, may be teaming with a third party marketer to

6 offer a green power option so that the consumer can have

7 default electricity service and not switch, but they can

8 basically green it up and buy green power. 

9 So, all told, more than 50 percent of consumers

10 can purchase green power directly from a utility or

11 electricity provider, and as I mentioned earlier,

12 renewable energy certificate options can be purchased

13 anywhere by all consumers in the U.S. because they can

14 just go online and purchase them from some of the

15 marketers. 

16 Green power markets provide support for nearly

17 30 percent of new renewable energy capacity additions. 

18 That’s new renewables that have been added since 1997. 

19 And this market has been growing rapidly at a rate of

20 about 50 percent annually in recent years. And

21 non-residential purchases are increasingly driving the

22 market. In 2006, almost three quarters of all sales were

23 to the non-residential sector, so businesses,

24 universities, government agencies, so forth. And we

25 estimate the size of the market to be 65 to 85 million in
47

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 2006 based on the green power sales. 

2 This slide just gives you some perspective on

3 how -- the voluntary market size is the red wedge and

4 compliance markets and the blue wedge is how much

5 renewable energy has been used or is going to be needed

6 to meet current policies that are in place, these current

7 RPS policies that I talked about. 

8 This slide just shows you that in most states

9 there are some utilities or power suppliers that are

10 offering green power options to consumers. You can see

11 in the upper Midwest there are some states with big,

12 large numbers like Minnesota and Iowa. In some cases,

13 states actually require the utilities to offer a green

14 power option to the consumers. 

15 We've collected data from marketers and utility

16 for a number of years about the size of this market. 

17 This slide is in millions of kilowatt hours annually, so

18 the sales in 2006 were about 12 billion-kilowatt hours. 

19 And as I said earlier, the market’s been growing at a

20 rate of about 50 percent annually. 

21 I guess I'll just mention, too, that this data,

22 we do collect this. The utilities and marketers report

23 this voluntarily to us. There's no requirement that they

24 do that. And I actually do think that, particularly in

25 '06, I think that this is really an underestimate because
48

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 not all of the suppliers provide was this information and

2 we can only fill in with the information that we have. 

3 But I think we are actually missing some here. 

4 The U.S. Environmental Protection Agency has a

5 program, the Green Power Partnership. You're going to

6 hear from some folks from there later today, but this

7 just gives you kind of a flavor. They work with a lot of

8 big companies that are purchasing green power and this is

9 just the list of top 20. They do issue these lists. 

10 There's probably a new one that just came out -- did it

11 come out yet? The next will come out in a few weeks. 

12 They have been issuing these about quarterly. 

13 So, it just gives you some kind of flavor of

14 the types of companies, and I think over the last couple

15 of years we have really seen this go a bit more

16 mainstream and some of the companies that are purchasing

17 are not the traditional ones that are always doing all

18 the environmentally friendly activities. So, it's been

19 kind of interesting to watch that. Also, I think it’s

20 spurred a lot of competition in that the companies are

21 trying to outdo themselves to move up on the list. 

22 Some of the companies that are purchasing green

23 power or renewable energy actually advertise that either

24 on their products, you can see the Silk soy milk, they

25 actually have a picture of a wind turbine on here, some
49

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 show the Green-e logo. The Green-e Program is a

2 certification program in the U.S. and, so, they're

3 showing that their product was made or distributed with

4 Green-e certified renewable energy. 

5 Other companies or utilities are working with

6 companies to help co-market their programs, so we have

7 been seeing a lot of that. Sacramento Municipal Utility

8 District worked with Starbucks to promote their green

9 power option, so forth. Some of these other things. We

10 have seen a lot more of that kind of activity in recent

11 years. 

12 Just real briefly, I provided some information

13 on REC prices here. These are compliance market REC

14 prices so RPS markets, which are pretty different from

15 voluntary markets because each state has their own rules

16 about what renewable energy types are eligible to meet

17 their RPS, where they have to be generated, what

18 geographic region they have to come from. And if states

19 have very strict and restrictive policies in place, the

20 price can be a lot higher if there are supply shortages

21 or trouble meeting those requirements. 

22 So, we have seen in New England, in particular,

23 some really high prices. These are in dollars per

24 megawatt hour. So, $50 a megawatt hour, 5 cents a

25 kilowatt hour in Connecticut, for instance, or
50

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Massachusetts. And then in other states, like Texas has

2 had much lower prices over time. So, there's a lot of

3 variability there, depending on the supply of the

4 renewables in the region and the requirements of the RPS. 

5 This is some information on wholesale voluntary

6 market REC prices. So, this is not the price to the end

7 use consumer per se, this will give you an indication

8 maybe closer to what a very large business purchase would

9 be or what the utility is purchasing it from. End use

10 consumer, like a residential consumer, those prices are

11 typically 1 to 2 and a half cents per kilowatt hour. You

12 can see these prices are in dollars per megawatt hour, so

13 they're much less. So, 0.1 to 1 cent a kilowatt hour

14 here. 

15 I guess I would just say that this data came

16 from Evolution Markets, which is a broker. It's actually

17 a pretty small subset of the actual transactions out

18 there. But I think it gives us some indication of what

19 the market prices are like. 

20 I kind of talked about some of the factors that

21 affect market prices, so I think I'm going to skip over

22 this, but you can read it for folks that have copies of

23 this or it's online. 

24 I just want to say a couple of things about

25 verification and certification of RECs. This market,
51

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 it’s still a very young market, but it has grown over

2 time and there's been some improvement in the

3 verification and certification programs during that time. 

4 Now, this map shows you where tracking systems

5 are in place to track RECs. Most of these have been

6 driven by state renewable portfolio standards because a

7 lot of the state policies use RECs to track compliance

8 with the policy. So, the REC tracking systems track the

9 ownership of the REC over time, and once it's used for

10 compliance with the policy, the RPS policy, it will be

11 retired, or if it's sold into the voluntary market, it

12 will be retired. So, it helps with double counting. 

13 So, you can see most of the U.S. is now covered

14 by the REC tracking systems. A couple of them just came

15 online within the last six months. The New York tracking

16 system in blue is supposed to come online maybe next 

17 year. And then in the southeast, all those white states

18 down there, there is no tracking system available at this

19 time for those states, although there may be in the near

20 future. 

21 I have just one minute left. So, I'm almost

22 done here. I guess I’d also just say that there are

23 certification programs out there that have been active

24 for a number of years and they conduct audits and ensure

25 that the RECs that are sold to consumers match those --
52

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 in terms of the quantity that the consumer is purchasing,

2 they do audits to make sure that all that matches up. 

3 Green-e has released some numbers about the

4 volume that they have been certifying and it was about 10

5 billion-kilowatt hours in 2006. So, it was about 80

6 percent of our estimate of the entire market size. 

7 Just a couple of issues and challenges to wrap

8 up. This is my last slide. What are the issues? As I

9 mentioned, REC tracking systems are not operational in

10 all regions of the country yet. There's a lot of debate

11 over additionality of RECs. I think we'll probably get

12 into this in panels coming forward. Do REC purchases

13 drive new renewable projects? There's been a lot of

14 discussion of that in the last year or two. 

15 The definition of a REC, are all attributes

16 included? Can renewable projects sell both a REC and a

17 greenhouse gas offset? Is there a potential for double

18 counting there or how do we make sure that there's no

19 double counting? And then will RECs or renewable energy

20 be able to convey the greenhouse gas benefits of the

21 renewable energy facility? The fact that it doesn’t have

22 any greenhouse gas emissions under carbon regulation, and

23 there's a lot of details about carbon policy design and

24 it depends on the policy design whether they will be able

25 to do that. 
53

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 I guess just, lastly, difficulty in

2 communicating the concept of a REC in simple advertising

3 language to retail customers. I think the industry has

4 evolved with that over time. 

5 So, that's it. Thank you very much. 

6 (Applause.)

7 MS. HANN: While Rebecca’s setting up, I just

8 wanted to make another announcement. If you have any

9 questions for this panel, can you please complete the

10 question cards and then someone will come around to

11 collect them. We will try our best to ask these

12 questions at the end of the panel. Thank you. 

13 MS. TUSHNET: And, now, for something

14 completely different. I was asked here to talk about the

15 First Amendment and the relationship of commercial speech

16 to carbon offsets and RECs. So, I'd like to address two

17 questions, what is commercial speech and what about that

18 speech may government permissibly regulate under the

19 First Amendment? 

20 For our purposes, speech about the use of these

21 things, carbon offsets and RECs and related

22 environmentally friendly -- I don't know whether I want

23 to call them advertising gimmicks for my purposes or

24 actual practices. We’ll call them practices, that's

25 fine. It's commercial speech. And that means that the
54

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 government can regulate it to avoid falsity or

2 misleadingness. But as we’ve already heard, the key

3 question is not necessarily misleadingness, although

4 there are, of course, compliance issues, but

5 confusingness. And that is a harder question, to what 

6 extent the government can regulate to prevent people from

7 being confused. And maybe there's not even a difference

8 between being confused and being misled. If we're just

9 concentrating on consumer outcomes, consumers who are

10 confused may end up making decisions just as if they were

11 misled. 

12 But start with what commercial speech isn't. 

13 Al Gore’s “An Inconvenient Truth” isn’t commercial speech

14 and if Al Gore is speaking just for himself and with no

15 commercial relationship to an organization's sake, for

16 example, Terrapass says, Terrapass is great, you should

17 use it, that's fully protected speech. And if he's

18 wrong, it's very hard to get him to shut up. If

19 Terrapass, however, says the same thing, that's

20 commercial speech. 

21 So, a product whose labeling says, your

22 purchase fights global warming, that's subject to

23 challenge for untruth by competitors, by consumers, and

24 by government regulators. And I don't want to limit my

25 remarks here to what the FTC has done or is in any way
55

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 likely to do because, as a business matter, if you're 

2 thinking about adopting these techniques or advertising

3 your use of them, you do want to consider all the

4 potential sources of challenge. 

5 So, in fact, the most important case for these

6 purposes is the case involving a consumer in California

7 who sued Nike for making a bunch of statements about its

8 labor practices under California's false advertising law. 

9 Basically, Nike came under sustained and coordinated

10 challenge for its labor practices involving

11 subcontractors in developing countries. It responded

12 with a comprehensive PR campaign, including letters to

13 the editor, ads in major papers, letters to college

14 presidents and athletic departments. Its PR people gave

15 interviews to newspaper reporters and so on. And none of

16 this or very little of this was conventional advertising. 

17 I want to pause here to show you parts of Nike's

18 campaign. 

19 So, this is the text. This is the full text of

20 the full page ad. So, there's a huge amount of white

21 space. Please don't try and read it. The point is not

22 what it said, the point is that this was a very emotional

23 and sort of affect laden campaign designed to say that

24 Nike cares, that Nike takes these issues seriously and is

25 attempting to address them, and so on and so forth. And
56

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 then Nike also sent a letter to college presidents and

2 athletic directors saying pretty much the same thing. 

3 The consumer sued saying that these statements

4 which basically had to do with labor conditions saying,

5 you know, people mostly get paid at our factories and

6 there aren't that many rapes and often they're fed, the

7 consumers said this wasn't true, that Nike was distorting

8 the conditions which were must worse than Nike admitted. 

9 And Nike's defense was that this was fully

10 protected speech under the First Amendment because among

11 the things Nike was saying was that although it wasn't

12 doing a perfect job, it was doing a lot better than the

13 other employers or the other alternatives that the

14 workers had. And its position was that in a time of

15 globalization it was better to be involved in these

16 things, to be trying than to not be there at all. And

17 that that is actually a political and economic message of

18 great importance that should be fully protected speech

19 just as much as “An Inconvenient Truth” is fully

20 protected speech. And, furthermore, you can't make that

21 kind of argument without saying specific things about

22 what your labor practices are. 

23 And I think the analogy here to things like

24 carbon offsets is quite strong. So, we just saw the

25 kinds of things that are now on the sides of, say, Silk
57

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 soy milk. That is an argument about how one ought to

2 produce goods and that actually has strong political and

3 economic implications, even though it's on the side of a

4 milk carton. The argument would go that that is fully

5 protected speech under the First Amendment. 

6 Now, the California Supreme Court disagreed and

7 said this is commercial speech. We can evaluate whether

8 it's true or false, at least the factual parts of it. 

9 The consumer can't challenge the statement that

10 globalization is good or that it's important to be

11 involved with labor practices rather than staying away. 

12 But if Nike says specific things about its labor

13 practices like, on average, we pay people a certain

14 amount per hour, that's a factual claim that can be

15 regulated even though it fits into this larger context. 

16 So, the California Supreme Court said what we

17 look at is whether speech comes from a commercial

18 speaker, whether it's directed to a commercial audience,

19 and university presidents and athletic directors are an

20 audience because they decide whether to have contracts

21 with Nike; likewise, if you advertise in a paper, you're

22 trying to reach a commercial audience, the people who

23 might buy Nike's products. There are representations of

24 fact about Nike's own business operations. And I want to

25 also make the point here that what Nike was talking about
58

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 was the operations of its subcontractors. 

2 So, traditionally, people say that commercial

3 speech is easier to regulate than political speech

4 because commercial speech is verifiable by the speaker. 

5 That's not always true in the sense that you may be

6 buying inputs from someone else. Here, Nike was talking

7 about the inputs it got. It was somewhat able to monitor

8 its subcontractors, but they were subcontractors, they

9 were independent entities and Nike didn't have control. 

10 But, nonetheless, the California Supreme Court said,

11 you're responsible for what you say about what those

12 subcontractors do, and that is important here, given the

13 structure of the markets we're looking at where most of

14 the people who are going to be making ultimate claims to

15 the consumer are probably buying these as inputs from

16 someone else. 

17 It's still commercial speech even if you don't

18 produce the input yourself as long as you have a

19 commercial motive for talking about what you have

20 purchased. Likewise, its commercial speech because Nike

21 made the speech for the purpose of selling products. 

22 This is important insofar as not all of the speech we're

23 talking about here will appear on the side of a milk

24 carton where it's pretty obvious that that's an

25 advertising message. If you put general image
59

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 advertising in the paper or wherever you think it's

2 likely to reach consumers that's still likely to be

3 commercial speech. In fact, it's almost certain to be

4 commercial speech under the standard because you are

5 trying to convince people ultimately to buy your

6 products. And, in fact, why else would Nike say these

7 things? 

8 Under the California Supreme Court standard,

9 almost everything a corporation says is going to be

10 commercial speech. The U.S. Supreme Court took the case

11 but, ultimately, didn't decide it and left the California

12 decision intact. It's not clear that the Supreme Court

13 would have agreed that all this stuff, including these

14 letters, was commercial speech, but it's very hard to see

15 where the California Supreme Court went wrong in my

16 opinion. If these are factual representations, they

17 pretty clearly are made by Nike to sell products, and if

18 we want to have regulation of commercial speech at all I

19 think we have to include speech like this. 

20 Now, some people will say we shouldn't have

21 extra regulation of commercial speech, but the FTC is set

22 up in part on the assumption that the Supreme Court's

23 doctrine allowing extra regulation of commercial speech

24 is true, is correct, and is the right way to go. 

25 So, quickly, assuming that most of the speech
60

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 we’re talking about is commercial, what counts under the

2 First Amendment as a representation of fact that could be

3 false and misleading? This is important because

4 commercial speech doctrine doesn't say commercial speech

5 can be regulated across the board. In past years, the

6 U.S. Supreme Court has been more aggressive about saying

7 it's very hard to regulate truthful commercial speech. 

8 It's very easy to regulate false and misleading

9 commercial speech, but it's much harder if you're trying

10 to regulate it just because you don't like it, say

11 cigarette ads. This, obviously, creates a huge premium

12 on deciding the difference between true and misleading. 

13 So, what about the phrase “good for the

14 environment?” Can it be false? I mean, obviously, it

15 can be false in some ways if the supplier is committing

16 fraud, if the product is made of lead or toxic materials,

17 then yes, it can be false. But that's actually not a

18 particularly interesting question. 

19 The troubling questions are, what if your

20 calculations or assumptions about environmental

21 friendliness are wrong even if you made them in good

22 faith? What if the FTC sets a standard for something and

23 you want to use another methodology to calculate your

24 environmental impact because you think that that standard

25 is better in complete good faith? If the FTC standard is
61

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 widely used, your standard could still be misleading

2 under current law. 

3 And a good example about this is miles per

4 gallon where consumers really use the single number, the

5 two numbers they get in order to make comparisons. What

6 consumers really care about is they don't know what the

7 methodology is. They believe that there is a methodology

8 and that there is a single one that allows them to make

9 decisions as between products in the marketplace, and

10 that is the key challenge.

11 What’s really underdeveloped in First Amendment

12 doctrine is the extent to which the government can say

13 these are the standards because it’s important to

14 consumers to be able to compare. Right now, the case law

15 is, I would say, very confused about the difference

16 between confusing consumers and misleading them. The

17 Supreme Court has made most of its attempts to say, if

18 you can clarify something, then the government can only

19 require you to clarify it rather than suppress the

20 message entirely.

21 But I think it’s pretty much an open question,

22 the extent to which the government is able to set

23 standards. Nobody has actually challenged the miles per

24 gallon standards on First Amendment rounds. There was a

25 challenge to the tar standards in the past for cigarettes
62

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 where a cigarette manufacturer wanted to calculate tar

2 differently. They actually had a plausible scientific

3 argument that the governing standards for calculating tar

4 were mistaken giving the way people actually smoke

5 cigarettes. But the Court still accepted the idea that

6 it was misleading to use a different standard because of

7 consumer expectations. 

8 And, again, I think this is going to be very

9 important in this area because we don’t expect consumers

10 to become experts on how all these things are calculated. 

11 That’s what we’re here for. The challenge is to convert

12 the specialized information into something that consumers

13 can reasonably and rationally use when they’re making

14 decisions on limited information. That is going to get

15 rid of a lot of nuance. There is no doubt that a

16 comprehensible regulation is going to smooth off a lot of

17 edges and make mistakes in small. I believe, however,

18 that the First Amendment allows the government to set

19 standards that overall improve consumer decision making,

20 even if that means that some of the maximum possible

21 information for the maximum informed consumer is lost.

22 But this is really actually a big open field in

23 First Amendment law because, to date, the Supreme Court

24 has not done very much in the field of consumer

25 protection on this issue of understanding specific
63

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 messages. 

2 Thank you. I’d be happy to talk further if you

3 have questions. 

4 (Applause.)

5 MS. HANN: Alan. 

6 MR. LEVY: I must begin by confessing that I

7 know very little about energy saving techniques or about

8 how marketing carbon offsets is likely to work. What I

9 do know a little about is product labeling and how

10 information disclosures on product labels are understood

11 and used by consumers. My task today is to introduce

12 some basic axioms of product marketing effects on

13 consumers, gleaned mostly from my experience with food

14 labeling in the hope that you can see how these 

15 principles might apply to your circumstances and how they

16 might help you design and implement better programs. 

17 The most striking characteristic of these kinds

18 of claims we're talking about today as mentioned

19 initially by the Commissioner is that they are pretty

20 strange product claims. Traditional product claims are

21 about product use characteristics from the perspective of

22 an individual user. Foods, for example, are marketed on

23 attributes like taste, cost, convenience and health

24 benefits. Such attributes follow from the experience of

25 using the product and are more or less verifiable from
64

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the user's own experience or from the collective

2 experience of the population of users, the latter being a

3 matter of scientific study. 

4 Carbon footprint claims, on the other hand, are

5 not really about product usage characteristics at all. 

6 They can't be verified by the consumer's experience with

7 the product. They're really an extreme form of what we

8 call credence claims where consumers have little or no

9 ability to verify the claim based on their own experience

10 and mainly have to rely on trust, a commodity in short

11 supply among American consumers. 

12 Carbon footprint claims are even stranger than

13 the environmental claims covered by the FTC Green Guides

14 like biodegradability or percent recycled content. These

15 are typically about use characteristics of the product

16 with public policy implications for a larger community. 

17 These kinds of claims at least seem to be objectively

18 verifiable based on science and product testing. 

19 Claims about offsetting one's carbon footprint

20 or being carbon neutral by contrast are claims about the

21 behavior of the product maker or service provider and,

22 for the most part, can't be evaluated by product testing. 

23 At their most concrete they seem to be about the

24 manufacturing processes used to produce the product. 

25 But, mostly, they are about someone's participation in
65

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 something called a carbon offset market. Participation

2 in a carbon offset market is itself being sold as a

3 strange hybrid kind of product or service. 

4 Besides being an extreme form of credence claim

5 that can't be verified by experience, claims about carbon

6 footprints have another distinctive characteristic. Few

7 people know very much about what they are and what

8 they're for. The existence of this workshop testifies to

9 there being some awareness of carbon emission markets

10 among the general public. But I think it is quite likely

11 that many people are like myself and they have only the

12 vaguest notion of what a carbon footprint is. They might

13 agree that driving a Hummer is probably bad for your

14 carbon footprint, but they have little idea about what a

15 carbon emission set aside market is and they have no clue

16 about how to think about the many issues that arise and

17 how to interpret and substantiate marketing claims made

18 about carbon neutrality or offset. 

19 Even more important than this widespread lack

20 of knowledge is the fact consumers are very likely to

21 agree that they know very little about the background for

22 any marketing claims they might see about these topics. 

23 These two characteristics, not being verifiable and

24 little prior knowledge or confidence about how to

25 interpret applied specific marketing claims, present
66

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 difficult practical challenges for carbon footprint

2 marketing. 

3 It's actually hard to avoid the conclusion that

4 buying a carbon neutral product is more like a symbolic

5 act than it is an act of consumption. There's a definite

6 public policy context, but a carbon neutral product is

7 really nothing but the claim that it is carbon neutral

8 and the credibility of the claim is essentially a matter

9 of faith. We see examples of marketing of symbolic acts

10 in everyday life. Voting comes to mind as a relevant

11 and shining example of a symbolic act. There are

12 probably important lessons to be learned from political

13 campaigning and public policy advocacy about how to

14 market carbon emission offsets. But I am not an expert

15 about political campaigning and, today, I want to

16 consider the marketing challenges of talking about carbon

17 emission offsets in the context of selling products. 

18 Let me turn now to Marketing 101. First of

19 all, it is important to understand that from the consumer

20 point of view the primary utility of label information in

21 most product advertising is intended to be informative

22 rather than entertaining is that it is a convenient

23 shortcut to conducting arduous information search about

24 product characteristics. People read labels in

25 advertising because they are interested in buying some
67

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 kind of product and they want to make a good decision. 

2 However, serious information search to inform

3 these decisions is costly. Information search takes time

4 and effort, appropriate information is not always

5 available, and when it exists, it may be difficult to

6 find. Even when consumers can find relevant information,

7 it is often hard to understand and use. Product labeling

8 and advertising are fundamentally devices to reduce all

9 these burdensome information costs on consumers.

10 Effective marketing has to serve and be seen by consumers

11 as serving this purpose above all else. 

12 There are several important implications of

13 this basic truth. First, because the media application

14 is to purchase decisions, advertising and labeling are

15 usually seen by consumers to be about a specific product

16 and not about a product category or about generic product

17 characteristics. Labels are not billboards where useful

18 information can be displayed outside of a practical

19 purchase context. Advertising is more flexible and

20 sometimes advertising can try to frame itself as being

21 broadly informative, unattached from any purchase 

22 context. 

23 We see this in certain kinds of advocacy

24 advertising that tap the benefits of a certain kind of

25 product like organic foods. But it is generally true
68

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 that consumers do not easily assume that what is said in

2 product advertising or on a product label is 

3 intrinsically educational. Consumers are not students

4 who want to understand general principles or experts who

5 want to know the details of scoring algorithms for the

6 strength of scientific evidence. 

7 Labeling and advertising is not seen as a place

8 to learn general truths that can be applied elsewhere. 

9 Consumers, for example, do not think of food labels as

10 good places to learn about nutrition. They are quite

11 sensitive about the space and time limitations inherent

12 in reading food labels and find it insulting to imply

13 that such a constrained information source should be

14 considered a learning opportunity for them. They’re even

15 less sanguine about being well educated by advertisers. 

16 Second, what consumers are looking for to

17 reduce the burden of information search is new and

18 relevant information. The best way to endear yourself to

19 consumers trying to make purchase decisions in the most

20 effective marketing is to tell them something relevant

21 about a product they don't already know. Product

22 specific information is an important category of new

23 information because information about unfamiliar products

24 is, by definition, new information. What is considered

25 relevant information usually depends on your personal
69

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 values and your needs. 

2 The point to be stressed here is that what is

3 seen to be new and relevant information depends most of

4 all on consumer prior knowledge and product experience. 

5 Third, and perhaps the most important

6 consequence of the information search saving nature of

7 product labeling and informative advertising, is that

8 consumers do not necessarily assume that information in

9 labeling and advertising is reliable. But they have to

10 think it is reliable in order for it to be useful to

11 them. They are exquisitely aware of the commercial

12 purpose of labeling and advertising which is to influence

13 them to make a purchase over and above any information

14 value labeling and advertising they have, and they are

15 wary and often savvy about the myriad ways they can be

16 misled. 

17 As a consequence, effective labeling and

18 information advertising has to pass a tacit legitimacy

19 test. It has to be seen as plausible, consistent with

20 what they already know, intended to be helpful and not

21 manipulative before consumers will accept the help it

22 promises in meeting their information search needs. It

23 is not as if consumers make a careful calculated

24 assessment of the truth value and good intent of every

25 statement on a product label or an ad. The point, after
70

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 all, is to save time and effort. They do not think of

2 themselves as scientists or regulators, but they are

3 reflexively critical, sensitive discrepancies from what

4 they already know and believe. They don't want to be

5 fooled by their own desire to save themselves time and

6 effort. This goes a long way to explain why product

7 manufacturers go to such effort to cultivate a positive

8 brand identity. 

9 For consumers, a positive brand identity is a

10 widely used shortcut that enables products to pass the

11 reflexive legitimacy test consumers normally apply to

12 marketing claims without triggering too much thinking

13 about the details on their part. 

14 A key point I want to emphasize here today is

15 the essential role played by prior knowledge in

16 determining how consumers respond to marketing claims. 

17 Effective marketing has to be based on a detailed

18 understanding of consumer knowledge about the issues that

19 are supposed to be informed by product information. All

20 marketing claims are implied claims in the sense that

21 they start from and rely on what consumers already know. 

22 Since I do not presume to have a deep

23 understanding of consumer problems in this area, I

24 hesitate to make specific recommendations, but I feel

25 quite comfortable in saying that identifying the state of
71

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 consumer knowledge, whether through surveys or

2 qualitative research and testing, whether various

3 possible marketing approaches are more or less congenial

4 with the current state of consumer knowledge, is the key

5 to developing an effective approach for marketing

6 products in this area. 

7 Because few consumers are likely to know about

8 how carbon emission set aside markets work and, yet,

9 consumers have to feel comfortable about the legitimacy

10 of marketing claims, marketers of carbon neutral and

11 carbon footprint claims are likely to have to initially

12 target those population segments who are already well13 informed and more interested in the issues. Consumers

14 have to feel they know what you are talking about before

15 they are likely to accept credence claims. 

16 Marketers will primarily have to use

17 informative advertising and labeling to reach consumers

18 because low knowledge levels and high consumer skepticism

19 of credence claims will tend to reduce the effectiveness

20 of advertising seen as frivolous or entertaining. There

21 is little hope in developing a mass market for carbon

22 neutral or carbon footprint products until knowledge

23 levels in the population are much higher than they are

24 today. 

25 Markets based on credence claims, the dietary
72

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 supplement market comes to mind, often specialize in

2 providing detailed information to consumers, often in

3 venues like Prevention Magazine that are not directly

4 associated with product marketing. Both to raise

5 population knowledge levels, facilitate acceptance of

6 their marketing claims and widen the potential customer

7 base. 

8 Marketers of carbon neutral and carbon

9 footprint claims will face the same challenge. Yet

10 marketing is quite handicapped in trying to raise

11 population knowledge levels. Most consumers prefer to

12 learn about matters of science, technology and public

13 policy from sources seen as objective and without

14 commercial interest. News coverage and what consumers

15 hear from Oprah are principal sources of information for

16 the general public. 

17 Fortunately, for marketers a large category of

18 news is about what is happening in the marketplace. 

19 Marketers of carbon footprint products need to promote

20 stories that will make favorable news probably more than

21 they need to do any other kind of traditional marketing. 

22 The last point I want to make about the nature

23 of effective marketing that applies quite directly to

24 your enterprise is that consumers make use of several

25 rules of thumb to separate helpful marketing that solves
73

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 their information search problem from promotional fluff

2 that serves commercial purposes. 

3 The first is that they are keen observers of

4 the marketplace. When claims are ubiquitous in the

5 marketplace, consumers tend to be confident that they

6 have been vetted efficiently to be trusted without

7 engaging in further vending on their own. There is

8 nothing more reassuring about the legitimacy of a claim

9 than the fact that everyone else takes it seriously. 

10 Another important cue is that when marketing

11 uses the same terms in a similar system of presentation

12 or format to convey information, it signals to consumers

13 that there is a consensus or maybe even a supervising

14 entity involved that can reign in the promotional

15 excesses of individual consumers. The consistent style

16 and format in the nutrition facts panels is one of its

17 greatest strengths. The importance of there appearing to

18 be an underlying consensus or a supervising entity behind

19 marketing claims explains why the demand for the FTC

20 Green Guides arose as much from industry as it did from

21 consumer advocates. 

22 Consumers are greatly reassured by the

23 appearance of consensus in the marketplace. Though they

24 are not likely to care that much about whether it's due

25 to regulation, scientific consensus or voluntary
74

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 self-regulation by marketers. 

2 The reverse is also true. Lack of consensus

3 and inconsistent marketing claims in terms of substance

4 format and presentation signals that there may be

5 ulterior motives at work and heightens the scrutiny that

6 all marketing is likely to get. It is not unlike the

7 phenomena observed by economists where bad money drives

8 out good money. Consumers are much more likely to

9 discount all marketing if there are inconsistent and

10 confusing claims being made in the market place. It is

11 hard to avoid the critique of being self-serving when

12 marketing for one product contradicts the marketing for

13 another. 

14 In a world where marketing claims are likely to

15 be subjected to critics from experts, competitors and

16 consumer advocates, it's hard to see how effective

17 marketing can be done without giving the impression that

18 it is based on common assumptions and common definitions. 

19 I'll end there because I’m over.

20 (Applause.)

21 MS. HANN: Now, we have some time for questions

22 for the panelists. The first is for Lori Bird. One of

23 the issues with RECs, renewable energy certificates, is

24 they are not tested for additionality. A way to address

25 this, as a buyer, would be to buy RECs out of a scarce
75

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 RPS or renewable portfolio standard market. So, this

2 questioner has two questions for you. 

3 First, is this currently possible? And if yes,

4 to what extent are compliance RECs sold in the voluntary

5 market? 

6 MR. NEWSOME: Lori, in addition to that

7 question, if you could just give a brief -- you mentioned

8 additionality for RECs, if you could just give us a brief

9 overview of what that means. 

10 MS. BIRD: The concept is, well, if you're

11 buying RECs, are you actually supporting the development

12 of new renewable energy sources or is it just coming from

13 facilities that would have come online anyway or are

14 already operating that might be cost effective? So,

15 there's been quite a bit of debate about this in the last

16 couple of years. 

17 Well, first of all, there is some standard, at

18 least the Green-e standard, does require an additionality

19 test in the sense that they don't certify any renewable

20 energy that would be used for an RPS policy. So, if it's

21 used for compliance with an RPS, it cannot be again sold

22 to consumers to get Green-e certification. So, there is

23 that additionality test. The EPA Green Power Partnership

24 also has that requirement. So, the market generally --

25 and I think that’s really the case, that there’s very
76

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 little double counting in that sense that occurs

2 currently. 

3 The new Green-e climate, I think we're going to

4 hear more about that later. That new standard that's

5 just emerging does include some additional additionality

6 tests, pardon my use of those words. But there are some

7 performance-based additionality tests that are in there

8 as well for RECs that would be used as offsets. 

9 So, that actually is emerging, there's a lot of

10 discussion about how to do that for RECs that are used

11 for offset purposes. But as I said, there has been this

12 additionality between RECs that are used for policy and

13 those that are used to supply voluntary markets for quite

14 some time and the market pretty much operates that way. 

15 What was the other part of the question? Oh,

16 whether you can purchase a REC from an RPS market and

17 basically tie that up. Yes, that certainly can occur. I

18 think the issue there is that they're probably going to

19 be higher-priced. The issue is, well, can you buy a REC

20 that's eligible for RPS compliance? There's a lot of

21 RECs that come out of Texas, but they have basically a

22 surplus of RECs available and those are pretty low-cost. 

23 There's a lot of renewable energy generation in Texas

24 because there's good wind resource there, and a lot of

25 that is used to supply the voluntary market. 
77

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 I guess really the question is, well, can you

2 buy RECs from a market that’s more constrained because

3 there had been, in the northeast in particular, some of

4 the RPS policies in place there are very stringent. The

5 states haven't necessarily been able to even meet their

6 RPS, and if you buy a REC from that region, it would

7 certainly be driving new renewables. It's just going to

8 cost more. But that's certainly available, it’s already

9 happening, and consumers can do that, you just have to

10 find a marketer that’s actually selling that. 

11 MS. HANN: Great, thank you. Our next question

12 is for Kate. Here is the question. Can you please tell

13 us a bit about the companies selling these products --

14 and I assume they mean carbon offset products -- in terms

15 of profit versus non-profit? Are individuals making

16 heaps of money off of these products? What's the best

17 source of this type of information for a consumer? 

18 MS. HAMILTON: So, there are both non-profits

19 and for-profits selling credits into the marketplace. 

20 And I don't think that it necessarily means that a for21 profit is making more money or buying a cheaper credit

22 and a non-profit is giving you a better deal than a for23 profit. I think that in general the non-profit sometimes

24 focus on more specific project types, the sort of

25 charismatic carbon, a lot of the non-profits are doing
78

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 forestry, but that’s not even completely true. So, it’s

2 a really interesting angle in this market that both

3 non-profits and for-profits are selling. 

4 And another interesting aspect of those is that

5 sometimes with a non-profit you can get a tax deduction

6 if you buy it, whereas with a for-profit you can't. So,

7 right now, for consumers, that's something interesting to

8 look at. I think as the market develops that will be

9 something interesting coming out since what that

10 influences is final price. 

11 The second one is, are they making heaps of

12 money?

13 MS. HANN: Yes, that’s right.

14 MS. HAMILTON: I don't know if they're making

15 heaps of money. I think that we were able to track

16 market prices up the value chain. So, the average price

17 for a project developer was significantly lower than -- 

18 I think around $3, I don’t have it off the top of my head

19 -- was significantly lower than the average selling price

20 from a broker versus the average selling price of a

21 wholesaler versus the average selling price of a

22 retailer, which was about $8. Then the average in total

23 was around $4. So, if you go up the supply chain you are

24 looking at higher prices. You're also looking at the

25 credits have been screened in each of these steps. So,
79

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 there are potentially benefits for the final consumers. 

2 But I have seen very few open books from

3 retailers saying this is how much we spent to do the

4 project, this is how much money we profited, and this is

5 what we're selling it to you at. 

6 MS. HANN: Great. Thank you, Kate. And I

7 have a question for Rebecca. You noted that the courts

8 are moving towards a quote, “clarify if you can,” end

9 quote, standard rather than suppressing commercial

10 speech. Can you please give an example of this approach? 

11 MS. TUSHNET: Actually, the Supreme Court has

12 done this most with lawyer advertising, I think, because

13 it feels fairly confident in assessing lawyer marketing

14 messages since they're all lawyers. I actually think

15 this is a mistake since they're lawyers, not consumers of 

16 lawyer services, but this is their belief anyway. So,

17 the cases are about whether lawyers can advertise

18 themselves as specialists or not. And the ruling is that

19 saying that you're certified say in some particular

20 specialty is not inherently misleading, so if you can

21 clarify exactly what that means, you can say it, even if

22 the bar would prefer not to allow you to advertise that

23 specialty at all. 

24 MS. HANN: Great. Thank you, Rebecca. I have

25 a question for Alan. Alan, you mentioned that there's an
80

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 information disconnect or just lack of information for

2 consumers. Could you give a sense of what kind of

3 information in general consumers would need to obtain

4 about a new product in order to pass the legitimacy

5 screen and, therefore, feel that these products are

6 actually credible? 

7 MR. LEVY: This is why I think you have to do

8 consumer research and you have to identify what the

9 current state of understanding and knowledge is because

10 I'm pretty positive that as consumers learn more about

11 these markets, one of the important effects is that new

12 issues are going to be raised in their minds about the

13 legitimacy of the claims. And the more they know, the

14 more they will know what kinds of questions need to be

15 asked and answered. So, it's going to depend a lot on

16 what the current state of understanding is in the

17 population and how much they know about these things. 

18 And I assume that what constitutes legitimate claims is

19 going to change as people become more knowledgeable. 

20 MR. NEWSOME: Alan, just to follow up. I'm

21 Hampton Newsome from the FTC. Could you give us just in

22 a nutshell description of the type of consumer research

23 that's generally done, just kind of the nuts and bolts of

24 how these types of projects are accomplished, how are

25 they set up and how you go about it? 
81

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 MR. LEVY: Well, usually there's several

2 phases. You typically talk to consumers in focus groups

3 and qualitative settings and get some idea about what

4 their general level of understanding is, what they think

5 is important and relevant and what they consider to be

6 new information. Then you would go to the general

7 population and do some kind of surveying and get sort of

8 quantitative estimates of how much people know about

9 specific issues and what their attitudes are and what

10 their practices are, what kinds of things they're doing. 

11 Finally, and the most important thing, is that

12 when you actually come up with an approach of how you

13 want to talk about your product or market your product,

14 you test it, and you test it in quasi experimental type

15 settings where you give it to people and have them

16 critique it and see how it works. So, you do that in

17 sort of several phases to get an understanding of what

18 the consumer knows and what's going to work. 

19 MS. HANN: Great. Thank you, Alan. We have

20 another question for Lori regarding RECs. In a voluntary

21 market, what happens to the money paid by a household to

22 buy these RECs? Who gets it and what do they do with it? 

23 MS. BIRD: I guess there's variability. 

24 Similar to the question that Kate answered, we don't

25 exactly get the information wholesale about what the
82

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 actual project is getting. But I think I did give some

2 numbers about prices and so forth and I do hear some of

3 the folks that own the renewable energy projects, what

4 they're getting for their RECs. And they're pretty

5 close, those wholesale prices that I provided, it's

6 pretty much in that range, pretty close. So, I think

7 that gives you some indication of the prices that we're

8 talking about. 

9 What they do with the money, there's

10 variability there. There are a couple of non-profit

11 organizations and some of the utilities promise that

12 they'll take a certain amount of the money and invest it

13 in new renewable energy facilities. Others make no

14 promises to that effect. So, there's a lot of

15 variability, I think, in the marketplace and some are

16 just making profit off that. 

17 MS. HANN: Terrific, thank you. We're running

18 out of time, actually. I have one final question for all

19 of the panelists, and here it is. Is there any ongoing

20 research to look at the types of claims being made about

21 these products and also consumer interpretation of them?

22 MR. LEVY: I'm not familiar with anything. 

23 MS. TUSHNET: I don't know of anything about

24 carbon offsets. I did want to actually give you an

25 example of something where -- so, Lexmark advertises that
83

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 it recycles cartridges that are returned to it. 

2 Actually, it thermally recycles them. What that means is

3 it turns them into ash. And they did a bunch of focus

4 groups on what people thought it meant, and people

5 generally did not think that it meant incinerating them. 

6 They thought that there was going to be something to do

7 with trees. So, this is an example of a company doing

8 market research that really didn't help it any because

9 now it's subject to a false advertising claim by a

10 competitor. 

11 So, right now, the take-away is that this is

12 very sporadic and likely to be embedded in other

13 marketing initiatives as companies try and test what

14 works for them most specifically, and a lot of it is

15 going to be proprietary. So, if this research is going

16 to happen, it is going to have to be led by public

17 interest groups or by the government. 

18 MS. BIRD: I'm not aware of any specific

19 research in that. Our research is really focused on the

20 growth in the market and so forth. 

21 MS. HAMILTON: I think the main area that’s

22 connected with looking at claims versus carbon offset

23 projects is really again coming up with standards and

24 that each standard is again for different areas of the

25 supply chain. One is for project developers and saying,
84

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 okay, are you doing what you're saying, and then to the

2 very end of a carbon neutral product and is this product

3 actually carbon neutral, has it actually measured its

4 emissions, have they tried to reduce their emissions

5 first and now are they getting appropriate offsets that

6 maybe have faced the standard from the project

7 development side? So, I think that's a big thing. 

8 And, in particular, the UK is looking at that

9 from a government viewpoint as well. Just an interesting

10 note. 

11 MS. HANN: Well, thank you very much. This

12 ends our first session. It's 10:55. We're taking a

13 break until 11:10. Thank you. 

14 (Applause.)

15

16

17

18

19

20

21

22

23

24

25
85

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 SESSION 2: PROPERTY RIGHTS AND PRODUCT DEVELOPMENT - 

2 ECONOMIC ANALYSIS

3 MR. HILGER: We're starting Session 2 on

4 Property Rights and Product Development: An Economic

5 Analysis of Carbon Offsets and RECs. We have two

6 speakers. Matthew Kotchen, who is an Assistant Professor

7 at the University of California Santa Barbara and the

8 Brent School of Science and Management and also a Fellow

9 at the National Bureau of Economic Research. He will be

10 talking about the market from an economic perspective. 

11 That will be followed by a talk from Carolyn

12 Fischer who is at Resources for the Future, and she will

13 be talking about carbon offsets and additionality issues. 

14 Matt. 

15 MS. PAPPALARDO: Before we get started, we also

16 want to mention that the slides will be available on our

17 website. So, if you’re concerned about not catching all

18 the details right now, you’ll be able to get them off the

19 web. 

20 MR. KOTCHEN: Well, I’d like to start by

21 thanking you all for inviting me to come and give this

22 presentation. As an academic, you travel around a lot

23 and talk to other professors and it's a real treat to

24 come here and talk to both academic researchers, but also

25 people who are really actively involved in the markets
86

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 that I study. So, it's sort of a bit of a reality check. 

2 I think I'm going to find out if I really know what I'm

3 talking about here a little bit. 

4 When I was invited to come to give a

5 presentation at the workshop, I have to say, this isn't

6 exactly what I envisioned. There’s a lot of folks here

7 and it's also exciting in that respect as well. If I had

8 known, I might have added a little more color to my

9 slides. 

10 But the title of my presentation is an 

11 Economic Perspective on the Market for Voluntary Carbon

12 Offsets. And I took the aim of what I was going to try

13 to accomplish in the brief amount of time that I have to

14 speak to think about how would you perceive these markets

15 or how would you think about these from the perspective

16 of economic theory with a particular emphasis of what you

17 can learn from applying an economic theoretic perspective

18 to these markets. 

19 So, that sets up this general outline that I

20 have of the presentation which is the first thing that I

21 want to convey is the idea that from an economic theory

22 perspective, you can think of these markets for voluntary

23 carbon offsets as an example of private provision of

24 public goods. But then I found this is not completely

25 satisfactory to explain the trends that we're seeing in
87

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 this market, so then it led me to thinking about it's

2 really a market for an impure public good, so I hope to

3 provide a brief introduction to an impure public good

4 interpretation. 

5 And then some of the work that I’ve been doing

6 recently, I’ve kind of then realized that, well, it’s not

7 even just impure public goods, it's really a market for

8 providing a public good for a bad. And this is the sense

9 in which I think that the market for carbon offsets

10 actually generates some new questions that both have

11 applied, and practical importance, but also have some

12 questions for us economists to think about as well

13 because they’re new questions and I don't think there's

14 existing models out there for necessarily characterizing

15 and making predictions for this market. 

16 Another thing that's come up in the earlier

17 session quite a bit that I felt I need to mention is just

18 the idea of asymmetric information in third parties. As

19 I was thinking about this before my presentation, I came

20 across some data. So, then, Point 5 here is I'm actually

21 going to provide a little bit of original empirical

22 analysis that I hope will provide some insight and help

23 influence some of the things that we're talking about

24 here today, and then I’ll close with some final thoughts. 

25 So, when thinking about the market for
88

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 voluntary carbon offsets, the first thing that comes to

2 mind for an economist is public goods. So, Econ 101

3 here, what are public goods? Well, there’s two defining

4 characteristics. The first is so called

5 non-excludability. What this means is that no one can be

6 prevented from enjoying the benefits of a good once the

7 good is actually provided.

8 The other is so-called non-rivalry which is one

9 individual's enjoyment of a good does not diminish any

10 other’s ability to enjoy the good. 

11 So, the immediate thing that jumps out at you

12 is that the market for -- or CO2 emission reductions in

13 general are public goods. And why? Well, you could

14 think about the reason for CO2 reductions is a more,

15 let’s say, stable climate and it turns out that you can't

16 prevent anybody from enjoying a more stable climate once

17 you have it and, also, one person's enjoyment of a more

18 stable climate doesn't diminish any other's ability to

19 enjoy a stable climate once it's provided. 

20 So, where does this leave us with the market

21 for voluntary carbon offsets? Well, offsets are an

22 example of privately provided public goods, which is

23 another way of saying it’s a market for voluntary

24 provision of public goods. Another way of thinking about

25 that is generally it’s some sort of a charitable activity
89

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 where people actually reach into their pockets and incur

2 a private cost in order to provide a public benefit. 

3 There's a whole host -- in fact, I would say

4 one of the more celebrated results of at least public

5 economics is the fact that when you leave the provision

6 of public goods up to private provision or voluntary

7 provision, you end up with underprovision or

8 inefficiently low level of the public good. 

9 Why does this arise? Well, there's two

10 incentives that are at play. The typical one that’s

11 mentioned is that of free riding, which is why would you

12 provide the public good when you can enjoy the benefits

13 that are provided from somebody else? You have an

14 incentive to free ride. 

15 Another thing, which I think may be at play in

16 a way in terms of the market for voluntary carbon

17 offsets, is you're too small. Any one individual who

18 purchases a carbon offset, I mean, let's get real here

19 for a second, it isn’t actually going to have a real

20 meaningful impact on reducing global CO2 emissions and,

21 therefore, providing a more stable climate. 

22 So, what I think of here and the way that I

23 think about this is that the market for voluntary offsets

24 warrants attention, but it's not attention as a primary

25 mechanism or policy intervention for addressing climate
90

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 change. This is a charitable sector that we're talking

2 here, but it is true, as we saw earlier, that this market

3 is growing. The estimate that we were given was it's $91

4 million in 2006. So, the financial commitment that

5 people are making in these markets is substantial. I

6 think it really warrants our attention for that purpose,

7 and in addition to what we're actually getting for that

8 money, but not as a viable policy mechanism in order for

9 addressing climate change. 

10 So, we’ve got a market for private provision of

11 public goods. But how do we explain -- in some sense you

12 could think of as anyone who purchases a voluntary offset

13 from a real economics perspective, it’s kind of a curious

14 behavior because the effect that you have on the problem

15 is so small. So, why do people actually do this? 

16 So, what it leads me to think of is another

17 strain of the literature called impure public goods or

18 offsets as impure public goods. Here, the idea is that

19 there's joint production of both a private and a public

20 characteristic. 

21 So, what I mean by that, let’s take this

22 example of voluntary carbon offsets. The public

23 characteristic of an offset when somebody purchases it is

24 the emission reductions that I just talked about, that is

25 both non-rival and non-excludable. 
91

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 But what can we think of as the private

2 benefits of purchasing a voluntary offset? Well, some of

3 the terms that are floating around in the literature are

4 warm glow. You simply get a warm glow or you feel good

5 from actually purchasing one of these offsets. 

6 Another one is social approval. Maybe you hang

7 in social networks where people say, well, there's this

8 personal norm that you should be doing your part. So,

9 you get social approval or recognition from your peer

10 group for doing something good. Maybe there's also

11 signaling. So, people signal about their income or

12 signal that you are a good person. Somebody told me

13 recently how you notice that when you see the Toyota

14 Prius on the road, you never see bumper stickers on the

15 Toyota Prius, and the reason is that the whole car is a

16 bumper sticker. You’re doing your part for the planet.

17 Well, you also are increasingly seeing decals on cars for

18 people buying carbon offsets and they’re so-called

19 driving neutral. 

20 Oftentimes, when you think about people who

21 donate to like National Public Radio, you get a free

22 t-shirt or you get a mug or you get theater tickets. 

23 Companies certainly get corporate social responsibility

24 benefits. Rarely do companies, when they’re carbon

25 neutral or rock-and-roll banks or the NFL or even NASCAR,
92

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 which I learned today, they advertise this claim and get

2 some benefits that they're actually good citizens. 

3 So, in a sense, you could think of these

4 private or joint products, these private benefits, in

5 some ways as subsidizing provision of the public good.

6 People are buying this joint product. 

7 But is it just that? Is that sufficient to

8 sort of reconcile what we’re seeing in the market for

9 carbon offsets with economic theory? I think the answer

10 is still no. So, when I purchased my ticket to come to

11 Washington, I purchased it on Travelocity, and I would

12 say within 15 minutes I got an email from them that said

13 I can effectively offset the negative environmental

14 impact of my entire trip, I can go without guilt, I can

15 go zero, and they were willing to sell me a carbon offset

16 for my air travel. 

17 On another site, drivinggreen.com, they say

18 everyone can effectively fight global warming by

19 offsetting the greenhouse gas emissions, they are

20 responsible for essentially erasing their carbon

21 footprint and undoing the damage. So, in a sense, you

22 could think back to this idea of warm glow. People are

23 buying a joint product for the reasons I’ve just said.

24 But, here, there’s something else going on. People are

25 doing something bad, so this market is also being driven
93

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 by let's offset that bad. That's probably intuitive to

2 many of us in this room, but it turns out that that has

3 implications for it’s not just charitable activities,

4 where when everybody buys or makes a contribution it's

5 going to have a positive effect. That's not necessarily

6 the case in terms of carbon offsets. 

7 So, offsets or carbon offsets are a private

8 provision of a public good for a bad. And in a sense,

9 what this means is that there’s a direct linkage to other

10 activity, say driving, which is the example that I have

11 been using. So, there's new questions for both

12 theoretical study and empirical study that relate to the

13 explicit link between the purchase of offset behavior and

14 this private good behavior that arises as well. 

15 So, there are many people who are skeptical of

16 carbon offsets and they say, well, even if I bought that

17 offset for my trip here on Travelocity, well, I wasn’t

18 going to take -- maybe I wouldn't have taken this trip if

19 I didn't have that opportunity to buy that offset. So,

20 is there actually a beneficial effect? It's possible

21 that people substitute and buy more gas-guzzling cars

22 when they can actually purchase an offset. 

23 So, the relationship between availability of

24 the offset market and these other markets become very

25 important for whether or not we think about these,
94

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 whether or not there are going to be benefits associated

2 with these markets, and it’s very related to the question

3 of additionality, which Carolyn is going to talk about

4 after me. 

5 So, what's going on out there in terms of

6 research in this area? Well, I have a paper and Joshua

7 Gans. His has a much more clever title, which is Carbon

8 Offsets in an Economy with Guilt-Ridden Consumers, and he

9 generates a bunch of predictions about under what

10 circumstances will it have a beneficial effect on the

11 environment and will it not have a beneficial effect on

12 the environment, which, of course, is very important to

13 people who purchase these and that question is important

14 to many of us here in this room. 

15 In terms of empirical evidence, well, Terrapass

16 conducts a survey which the results and some of it is

17 discussed on their webpage, where they did a survey of

18 people that purchased their offsets. And they show that

19 these people, compared to the general population,

20 actually tend to live a more greener, less carbon

21 intensive lifestyle. So, the pitch there is that maybe

22 these people aren't purchasing these offsets in order to

23 live a more carbon intensive lifestyle, maybe they're

24 actually having a beneficial effect on environmental

25 quality. So, these skeptics don't have to be so
95

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 skeptical about what's going on. 

2 As an academic researcher, I think that this is

3 suggestive, but it’s certainly not conclusive. What we

4 don't want to do is compare the people who purchase the

5 offsets to the people who don't purchase the offsets. We

6 want to know what Terrapass purchasers would have done if

7 they didn't purchase an offset. But, of course, this

8 counterfactual doesn't exist and is difficult from a

9 research perspective. 

10 So, trying to get at this, some research that

11 I’ve been working on with Michael Moore at the University

12 of Michigan, we looked at households that are members of

13 environmental organizations in terms of their electricity

14 consumption. We found that households that have a head

15 of husband hold that actually have purchased a carbon --

16 that are members of an environmental organization

17 actually consume significantly less electricity and where

18 the opportunity to purchase renewable energy their

19 electricity consumption does not increase. 

20 So, that was one minute left? I missed that

21 second five-minute -- can I buy an offset and get a

22 little more time? 

23 The other thing I just want to mention here, I

24 can get through this really quick, is the idea of

25 information, asymmetric information which is very
96

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 important in third parties. I’m going to jump to my

2 results, but I found a website that actually lists a lot

3 of information on 66 different providers on 180 different

4 projects. 

5 So, what I did is I tried to do a little

6 economic detective work here and figure out what I could

7 learn about the data that's actually out there, even

8 though there's not a lot. You can look through these

9 descriptive statistics online, if you like, and I’ve got

10 the slides, but basically what I did is I looked up

11 prices. So, this is a distribution of the different

12 prices for the offsets and you can see that it's 

13 amazingly uniform. Of the 66 different providers, the

14 prices range from about $43 down to $3 and there’s about

15 one at each price. So, if you want to buy an offset,

16 pick your price and there's someone out there online who

17 you can buy your offset from. 

18 But what explains these prices? Well, what I

19 did is I estimated -- as an economist I'm interested in

20 prices and I estimated a regression model and I tried to

21 explain -- I tried to come up with variables that explain

22 differences in these prices and I'll jump right to the

23 results here. It turns out that the offsets in North

24 America are about 53 percent less, these are

25 statistically significant results, in Australasia than
97

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 they are in Europe. So, they’re much cheaper. There’s

2 no statistically significant effects getting at what we

3 were talking about before where the number of projects

4 that are not-for-profit or for-profit status, there’s no

5 significant difference in prices. 

6 But what's very interesting in the context of

7 the charge here in this workshop is that those that had

8 formal certification actually charged the 47 percent

9 higher price for the offset for the equivalent amount of

10 offsets. 

11 So, what’s going on here? I sort of pose the

12 question out here because this is very preliminary. As

13 an economist, it seems you could say, well, those that

14 are getting certification are actually doing something

15 that makes it more costly for them, or you could say that

16 actually just having that certification enables them to

17 get a higher-priced premium from consumers. So, maybe we

18 could talk about that a little later.

19 But my general conclusions here are that it

20 takes both existing and new theory from an economics

21 perspective to understand what's going on in this offset

22 market. Asymmetric information is an important thing

23 that’s going on and there seems to be some observable

24 differences in these prices, which we can explain with

25 things that may have real relevance for thinking about
98

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the future of third party certification information

2 provision and even the role of the FTC in getting

3 involved in these markets. Thank you. 

4 (Applause.)

5 MR. HILGER: Thank you very much, Matthew. 

6 And, again, all of these slides are available on the

7 conference website. So, if you want to look at his

8 analysis and there are citations to his research. 

9 Also, if you have any questions, there are

10 question cards floating around the audience or you could

11 raise your hand and get one and it will be collected and

12 then you'll have a chance to ask your questions. 

13 Next will be Carolyn Fischer on RECs for carbon

14 offsets and additionality. Carolyn, thank you. 

15 MS. FISCHER: Thanks, and I’m very glad to be

16 here and excited to see such a good turnout for

17 discussing these issues. I'm with Resources for the

18 Future. For those not familiar with RFF, we're an

19 independent non-profit research institute focused on

20 environmental and natural resource policy issues. We

21 have been around for over 50 years trying to improve

22 policymaking. 

23 Now, I'm going to focus not just on carbon

24 offsets, but specifically on using RECs for carbon

25 offsets, and kind of question to what extent are these
99

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 things interchangeable? A fundamental point to make is

2 that we have two different kinds of policies. We’ve got

3 a set of policies to promote renewable energy and a set

4 of potential policies to reduce greenhouse gas emissions. 

5 They’re different policies with different rationales, but

6 to some extent they do support kind of twin goals. 

7 So, we have renewable generation policies that

8 are there to support the innovation and diffusion and

9 promote the scale economies that we need to make these

10 technologies viable in the marketplace, but as a

11 byproduct from that, by expanding renewable energy to

12 some extent we do get greenhouse gas reductions. 

13 On the other hand, we have greenhouse gas

14 policies, like emissions trading programs like we have in

15 Europe, and they're setting up in some states in the

16 Regional Greenhouse Gas Initiative and in California. 

17 These programs are designed to reduce greenhouse gas

18 emissions preferably by any means that are cost

19 effective. That's why we're looking towards market-based

20 mechanisms like emissions trading, so that it’s cost

21 effective. 

22 Well, a byproduct of these policies is by

23 making fossil fuel technologies more expensive, they're

24 going to make renewable energy more competitive. So, we

25 get a boost in renewable energy as a byproduct to these
100

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 policies. 

2 So, you have both policies get you some of

3 both, but they really have different emphasis and the

4 credits associated with each policy are going to mean

5 slightly different things. 

6 It's also important to take account of the

7 policy context for renewable generation. It's not just

8 RECs. We’ve got a lot of other policies supporting

9 renewable energy out there, federal tax credits, loans, a

10 lot of states we’ve seen have renewable portfolio

11 standards, other incentives, too. We've got voluntary

12 programs and then RECs. These RECs, themselves, have

13 multiple uses. One is compliance with different RPS

14 programs, renewable portfolio standards for complying

15 with retail green power offerings that utilities provide

16 for consumers to offset their power purchases if they

17 want to and, potentially, to offset things other than

18 power like greenhouse gases. 

19 So, this is kind of the key question and the

20 role of voluntary offsets. So, in the absence of

21 mandatory nationwide greenhouse gas policy, to what

22 extent can these voluntary programs for renewable energy

23 reduce our greenhouse gas emissions? That's kind of the

24 key question I'm going to focus on. 

25 For doing this, then you have to calculate what
101

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 are the offsets, what are the greenhouse gas reductions

2 that we're getting from our RECs? And it’s just like any

3 offset program really, it requires comparison to a

4 baseline counterfactual of what emissions you would be

5 getting in the absence of these credits. And this

6 requires, typically, a project-specific methodology like

7 we have in the clean development mechanism as part of

8 Kyoto protocol, which a lot of European countries are

9 focused on. 

10 So, there's been a lot of effort put in to

11 improving the methodologies for this. But, basically,

12 you have to forecast what your generation emissions would

13 have been in the absence of this project and then,

14 hopefully, after the project goes through, you observe

15 the actual generation in emissions, you compare them to

16 this baseline, you have monitoring verification and also

17 verification of the methodology, and then you issue the

18 credits.

19 But there are a lot of difficulties with any

20 form of offset program because it's voluntary. So, when

21 people aren't forced to comply with a greenhouse gas

22 reductions regulation, they're joining the program

23 because they want to. We don't necessarily know why they

24 want to do that. We can't observe the counterfactual of

25 what would happen in the absence of this project if it
102

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 doesn't go through. You observe one or the other. 

2 One of the problems is, as Matt mentioned,

3 asymmetric information. You have that problem here, too,

4 in figuring out additionality because the investors who

5 are intending to go through with the renewable energy

6 policy, they have a lot better information about what

7 they were going to do in the absence of getting these REC

8 credits than you do or than a third party verifier does. 

9 So, these offset programs tend to attract a lot

10 of people that would have done it anyway because it's an

11 extra bonus for them, and then they also track some

12 people who wouldn't have done it anyway because there's

13 sufficient extra return generated by the credits and it

14 makes it worth their while. It's difficult to

15 distinguish between these two. So, the general tendency

16 in these kinds of project-based offset programs is to 

17 overallocate. 

18 In the case of RECs, you kind of have to think

19 through of how you would do this. You have two

20 components that you need to worry about because these

21 aren't projects that directly reduce emissions. You

22 have, first of all, the question of is the renewable

23 energy itself additional? So, would it not have been

24 generated otherwise but for the credits? And then what

25 emissions does this particular project display? What's
103

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the conversion rate for this project? It's going to

2 depend on what the generation mix is in the selling area. 

3 And, also, I'm going to argue whether the area has a

4 greenhouse gas emissions cap or not, which is becoming

5 relevant quickly. 

6 Now, one of the problems in determining

7 additionality of the renewable energy is that RECs really

8 aren’t designed to certify additionality. They're

9 designed to certify renewable generation. And you can

10 see this in some renewable portfolio standard systems,

11 they include pre-existing renewables, especially hydro12 electricity to allow for a larger percentage. Maybe you

13 have noticed on the map, Maine has a huge RPS standard,

14 it’s 40 percent. Well, that includes hydro and that’s

15 where they get most of it and they actually have

16 relatively low prices. Massachusetts has a 4 percent

17 standard, but it actually turns out to be one of the

18 strictest RPS standards because it's for new renewables

19 in Massachusetts and it narrows that category. 

20 So, those things mean very different things in

21 terms of the stringency, but it actually -- the

22 additionality part doesn't matter so much for the RPS

23 because states can choose to incorporate whatever

24 baseline renewable energy is in there into their targets

25 when they're setting the stringency and, basically,
104

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 whether you include that or not, it serves as a transfer

2 to those firms that are generating already. But it

3 doesn't affect the efficiency of the program or the

4 incentives. What does that is the effective stringency

5 including that baseline, otherwise it's just a transfer

6 within the system. 

7 But additionality really does matter for

8 offsets because if you're trying to get for carbon

9 reductions as opposed to just you want to promote a

10 certain share of renewable energy in your portfolio or

11 promote renewable energy in general, it matters because

12 you're granting these offsets to entities outside carbon

13 regulation that are expecting some carbon reductions. 

14 There's some additional issues like are the

15 RECs themselves additional, can they not resell them? I

16 think other people have addressed this. My sense is that

17 that’s not really a problem. Most RPS systems have

18 provisions to ensure that there isn't double counting. 

19 There's also a question of accuracy. Are the

20 RECs being allocated for installed capacity or for actual

21 generation? This can matter because there's a lot of

22 variability in renewable energy and it varies along the

23 peak load profile, so you may be displacing different

24 things across the peak load profile. Some of these are

25 sort of ideas of are you displacing energy in fossil
105

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 fuels in the short run or the long run? 

2 Regarding the conversion rate, there are

3 complications because what you really want to know is,

4 okay, so you’ve established that we have some additional

5 renewable energy. What is it offsetting? So, what you

6 want to know is not what the average emissions rate per

7 kilowatt hour is in the country or even in that region,

8 you actually want to know what is the marginal source of

9 generation in that area where the renewable provider is

10 serving. And you can see that we have very different

11 emission rates depending on whether that's natural gas or

12 coal or hydro or energy efficiency. So that would be if

13 prices fall, then you get less energy efficiency. 

14 So, what is the marginal source that is being

15 replaced by additional renewable energy? And you can see

16 it varies a lot by region, and this can also vary over

17 the peak load profile. So, if you’re assuming that it's

18 displacing coal-fired electricity, that gets you a lot

19 more offsets than if it’s actually from natural gas,

20 which is often the marginal source. But just to see the

21 disparity, again, these are average and not marginal, I

22 couldn't find those, I borrowed this from an EPA

23 presentation from folks that run the EGRID model, which

24 is often used to do these kinds of calculations. So,

25 there's a really wide disparity of average emissions
106

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 rates around the country and then, presumably, also

2 marginal. 

3 There's an important role served by regional 

4 greenhouse gas policy, too. It starts to matter where

5 your RECs come from. If they're coming from regions that

6 have a greenhouse gas cap as is developing -- for now if

7 you bought them from Europe especially. I'm going

8 backwards. 

9 So, if you're buying it from areas like the

10 west that don't have a greenhouse gas emissions cap, then

11 these can represent real offsets, subject to what I was

12 talking about, the challenges of actually calculating

13 what the offsets are. But if you’re buying it from

14 someplace that has the cap like some of the states that

15 are in the northeast that are thinking about it, then the

16 effect on total greenhouse gas emissions is going to be

17 zero. So, you're buying a REC from Europe that enables

18 more renewable energy, that enables electricity sector to

19 meet its greenhouse gas emissions target more cost

20 efficiently, so they can sell some emissions permits to

21 someone else and the price and quantities will

22 equilibrate, so you end up with the same amount of

23 emissions, so you get no offsets in that case. Depending

24 on how you account for leakage, that’s really

25 complicated. 
107

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 There's also a certain role in interactions

2 with regional RPS policies because you're kind of in

3 competition for some of the same things, for same RECs. 

4 So, if you're using RECs from regions again without the

5 RPS, this is going to provide additional subsidy to 

6 renewables. So, that's going to crowd out fossil fuel

7 generation to some extent, but it's going to tend to

8 lower generation costs and thereby typically prices and

9 there's also less incentive to conserve. Some of that

10 will end up as a demand impact. Whereas using RECs from

11 regions with the RPS, that’s going to tend to drive up

12 the prices, crowd out fossil generation and maybe crowd

13 in a little bit of conservation. 

14 There are additional regional issues in that

15 because if these voluntary markets develop at such a

16 scale to influence the markets, you can see kind of

17 overlapping impacts on these other programs and also

18 recognize that you're going to need the cooperation of

19 all these jurisdictions not to change their targets in

20 response to ensure that compliance and to coordinate with

21 their greenhouse gas policies. 

22 So, in conclusion, in areas without greenhouse

23 gas caps, voluntary purchases of additional renewable

24 energy can lead to greenhouse gas emissions reductions. 

25 But the calculations are really difficult and they're
108

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 source-specific, and the current RECs are not designed

2 for this, they're designed to certify renewable

3 generation, renewable generation of specific types as

4 well because RPS policies differ on what type of

5 renewables they allow. But it seems like we need

6 something like RECs plus that would certify these

7 additional attributes. They're not set up to certify

8 carbon displacement attributes. They're much better at 

9 certifying renewable generation. 

10 It's also important to recognize kind of in the

11 long run that demand for offsets overlaps with REC demand

12 created by all these other policies and programs and,

13 ultimately, we should really be thinking of this as a

14 transitional policy because once we get a greenhouse gas

15 cap, then these kind of voluntary offsets are moved, or

16 other than going abroad and looking for offsets in

17 developing countries that don't have emissions caps or

18 then you've also then got your ultimate offset. You can

19 buy an emissions permit and yourself kind of shrink that

20 cap. 

21 In fact, that's what we're doing at a

22 conference this summer a colleague of mine is organizing. 

23 He’s decided he doesn't believe in offsets and, so, he's

24 buying European ETS permits for it to offset. So, thank

25 you.
109

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 (Applause.)

2 MR. HILGER: Thank you very much, Carolyn. 

3 MS. PAPPALARDO: We have lots of interesting

4 questions coming in. The first one I already shared with

5 Matt. What was Matt going to say on the asymmetric

6 information slide that he largely skipped? 

7 MR. KOTCHEN: Well, let's make it not

8 asymmetric information here in the sense that I know it

9 and you don't. So, what I was going to say is asymmetric

10 information provides an opportunity for third parties. 

11 So, asymmetric information which the idea was the basis

12 for the 2001 Nobel prize in economics is that when one

13 party in a transaction has more information than another,

14 and this is a concern in the market for carbon offsets

15 because it means that there could be some -- the sellers

16 may not deliver on what they're saying, but also

17 consumers may get discouraged because they don't believe

18 the claims that are actually being made, which is

19 relevant for here, what we’re talking about here. 

20 So, third parties can set standards and

21 certify, these can come from governmental agencies or

22 NOGS. But another area where it's sort of happening,

23 which is where I got the data for some of the conclusions

24 that I showed, were just third parties that are just out

25 there to provide information, where they just list and
110

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 you can go to their website and find out different

2 characteristics of these providers and make your choice

3 that way. So, it sort of provides an opportunity for

4 third parties and we already see evidence that they're

5 starting to fill those niches. 

6 MS. PAPPALARDO: Great. Another question for

7 Matt. Why isn't the carbon market global? If it is, why

8 doesn't the law of one price apply? Are offsets

9 differentiated products? 

10 MR. KOTCHEN: So, I think that was an isn't,

11 just to be clear, right? Why isn't? 

12 MS. PAPPALARDO: Why doesn’t? 

13 MR. KOTCHEN: So, I think that that's -- I

14 totally agree, which is why I think it's so curious that

15 you see such variation in prices out there. A ton of CO2

16 emitted into the atmosphere, it doesn't matter where it

17 comes from, so if you want to buy an offset, you could

18 buy an offset that’s based in Australia, in Europe,

19 Africa or the U.S. That is, of course, unless you're

20 buying a joint product and you actually care about where

21 that offset is. So, you may actually believe that if the

22 emissions happens in the U.S. that the offset should

23 occur in the U.S. And if that's the case maybe there

24 would be differences in prices. 

25 MR. HILGER: Next, an open question for both
111

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 of you. Are the limitations of public benefits -- more

2 Matt. Are the limitations of public benefits, you

3 discussed the example free riding, minimized or

4 eliminated when companies purchase the offset for an

5 advertising purpose and then sell their goods at

6 competitive prices? 

7 MR. KOTCHEN: That is related to a lot of the

8 research that’s being done in sort of the literature of

9 corporate social responsibility. If it's more costly for

10 companies to buy offsets and then they go out and their

11 costs are then higher and they compete in a market where

12 they're just competing on price does not eliminate the

13 incentive. That would be true, again, unless there's

14 differentiated products where people are actually willing

15 to pay a price premium for this other information, then,

16 in fact, it could be sustained. But at least the

17 economic theory would say that if it’s more costly for

18 companies to do this and then nobody cares about it, then

19 they would be competing in the market and that may be

20 true. But it also raises the question of whether or not

21 the carbon offset market really is competitive now or

22 not. 

23 MS. PAPPALARDO: We have a question for

24 Carolyn. Can you comment on recent Green-e climate

25 standards? Does it address concerns you highlighted
112

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 effectively, in your opinion? 

2 MS. FISCHER: I guess I'm not quite familiar

3 enough with the specifics of the Green-e standards. I

4 was looking over some of their requirements and they do

5 seem to make an effort to calculate these things. But

6 it's a very difficult and complex procedure and I'm not

7 sure how well anyone can really get at the additionality

8 questions of the renewable energy, and then also the

9 marginal, whether they do average emissions displaced or

10 really marginal which is what you would want.

11 MS. PAPPALARDO: I think the next question

12 probably follows on to your comment. Given the

13 difficulty in ensuring RECs offset GHGs, would you

14 recommend a moratorium on calling RECs offsets? 

15 MS. FISCHER: I did notice in some places that

16 some people hesitate to make a claim in terms of the

17 carbon offsets for RECs and you can choose to buy RECs

18 for renewable energy or you can choose to buy offsets.

19 I'm very comfortable with those kinds of claims. And I

20 think the methodology needs to be considered and

21 standardized across products to feel confident in the

22 claims of RECs as carbon offsets. 

23 MR. HILGER: The next question, the discussion

24 assumes that the offset or credit must drive additional

25 value for the low or zero greenhouse gas emission
113

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 attribute. This may not be the most important value to

2 the provider. It might be the long term power purchasing

3 agreements that help finance a new project that would not

4 be developed otherwise, additionality. What are your

5 opinions? 

6 MS. FISCHER: Again, that’s similar to my last

7 answer that there are a lot of reasons why people want to

8 buy green power, and it's not just carbon, it's also to

9 promote the technology, you get other air quality --

10 local air quality benefits from shifting towards

11 renewable energy from other sources, at least wind and

12 solar. So, again, I'm a lot more comfortable with

13 considering RECs for what they are in terms of

14 representing renewable energy and there are additional

15 values to that that some people might place on it,

16 compared to just carbon offsets. 

17 MR. HILGER: Does the design of cap and trade

18 programs determine whether RECs affect CO2 emission

19 levels? 

20 MS. FISCHER: The key feature is the cap, that

21 emissions are fixed. If we had a carbon tax instead,

22 then the answer would change because you have a fixed

23 price. The purchasing of the REC isn't going to change

24 the emissions price and thereby the incentives for

25 everybody else in the market to reduce their emissions. 
114

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 But by the fact that you have a cap and then you have an

2 endogenous, a market-determined price for those emissions

3 reductions, then you're always going to be meeting the

4 cap. So, that's the key design feature that matters. 

5 MS. PAPPALARDO: Thank you. One generic

6 question that we have is, how do the challenges differ

7 with offsets that come bundled with other products like

8 snacks or vehicles versus offsets solo? 

9 MS. FISCHER: Do you want to take this? 

10 MR. KOTCHEN: I guess the question then about

11 how it affects the other behavior becomes a little bit

12 more constrained. So, if you think about individuals

13 making choices about what car to drive versus buying an

14 offset or not their vehicle choice, but then certain

15 vehicles come along with automatic offsets. I guess it’s

16 sort of interesting, some vehicles come with like a year

17 free of gas. I wouldn't be surprised if we get vehicles

18 coming now with a year of carbon offsets along with them,

19 and then it sort of depends upon the price. How that

20 affects the price and the outside option that individuals

21 could actually make these decisions and decouple them on

22 their own. So, it sort of makes another option in terms

23 of how those behaviors would interact or the

24 substitutability between them. 

25 MR. HILGER: What economic insights should
115

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 regulators keep in mind when they evaluate substantiation

2 for claims that an offset project actually reduces carbon

3 emissions? And let me preface that by when one is buying

4 a carbon offset, what exactly is one purchasing? 

5 MR. KOTCHEN: That is a good question. I don't

6 necessarily have the answer. There's lots of people here

7 who are working and would probably give better insight

8 into that I would guess later in the day. But one thing

9 that comes about are these third parties that are

10 providing information where a lot of the criteria that

11 they have are a transparency of what's going on and

12 whether or not companies are actually providing it when

13 people purchase the offset. 

14 So, I think that that's going to become

15 increasingly important about whether or not it's based on

16 energy production, whether or not it’s based on avoided

17 deforestation, whether or not it’s based on any low till

18 agriculture, lots of different types of things that could

19 come about.

20 So, I think that you can find some of this out

21 on some of these third party websites that are out there

22 and we're actually working with this data set now, but I

23 can't answer that really generally yet. 

24 MS. PAPPALARDO: One general question that

25 arises is that there’s scientific uncertainty and
116

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 certainly about new product, a lot of uncertainty about

2 how the market is developing in this area. Marketing

3 claims for products involving uncertainty of facts raise

4 difficult regulatory questions. One question to consider

5 is the trade-off between Type 1 and Type 2 regulatory

6 errors. That is a trade-off between allowing claims that

7 eventually turn out to be harmful versus prohibiting

8 claims that would have been beneficial. 

9 Given your analysis of the market, what are the

10 risks associated with both types of errors and how

11 serious are they? 

12 MS. FISCHER: Okay. Well, I can never remember

13 which is the Type 1 or 2 and, apparently, it's backwards

14 here. So, let's just break it down into the risk of

15 allowing untrue claims. So, this is the risk first that

16 consumers aren’t going to be getting what they expect. 

17 They’re going to be wasting money. Also, if those

18 consumers are -- these are actually offsets allowed in a 

19 greenhouse gas emission system, then you're risking

20 expanding the cap and not getting the full reductions 

21 that you expected, as opposed to reductions outside the

22 cap, you're going to get some. 

23 In the case if it's a regulated entity within a

24 cap, you're actually going to increase emissions because

25 if they're not getting the full offset, the full carbon
117

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 reductions from their offsets, that's allowing them to

2 emit more under the cap, then you're effectively

3 expanding the cap. So, that's an important risk 

4 there. 

5 And I think that's also perhaps one of the

6 explanations why credits seem to be more expensive in

7 Europe. They might have tighter standards if these are

8 mechanisms that allow them to offset their greenhouse gas

9 liability under the ETS. 

10 And then the risk is that if you have a lot of

11 these in the market and they're cheaper to provide, less

12 legitimate offsets than fully legitimate offsets, then

13 you’re going to tend to crowd out the legitimate

14 products, you’re going to drive down the price and make

15 these other options uneconomic, and to the extent that

16 you undermine confidence in the whole system, that's

17 going to drive down the price and reinforce this effect

18 more. So, I see risks on that side. 

19 The risk of prohibiting claims that are

20 actually true, then you're going to stifle that market,

21 you're going to potentially limit legitimate

22 opportunities and, so, there's a question there. I don't

23 know that I have a good sense of how large one is

24 relative to the other. 

25 MS. PAPPALARDO: Well, thank you so much. We
118

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 had lots of questions, lots to think about. Thank you

2 very much. 

3 (Applause.)

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25
119

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 SESSION 3: TECHNICAL SUBSTANTIATION ISSUES

2 MR. NEWSOME: Welcome back, everybody. I'm

3 Hampton Newsome from the FTC. This is Session 3. During

4 this session, we're going to talk about technical

5 substantiation issues. I think we have got a great panel

6 here. 

7 As we discussed this morning, substantiation is

8 a key concept under FTC's consumer protection law. And

9 in the area of offsets and RECs, things can get

10 complicated. There are lots of moving parts. There are

11 questions you have to answer, how do you determine your

12 greenhouse gas emissions from everyday activities? If

13 you're using that as part of your claims to figure out

14 what the average consumer -- how much their activities

15 are creating. 

16 Other questions, how do you calculate the

17 emission reductions from your offset activities? Also,

18 another important question is, how do you track offsets

19 and credits and renewable energy certificates and how do

20 you verify that they're not being double counted? That's

21 another important question. 

22 So, we have four people that are very involved

23 in these types of activities, very knowledgeable, and

24 they're going to walk through some of these issues with

25 us. 
120

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 To begin with, we’ve got Derick Broekhoff from

2 World Resources Institute. He helps direct the

3 greenhouse gas protocol team there. And then after that

4 we'll have Jim Sullivan, who is Director of EPA's Climate

5 Leaders Program. And then Maurice LeFranc from EPA, and

6 he’s in the Climate Change Division of the Office of

7 Atmospheric Programs. And we'll wrap with Ed Holt, who’s

8 a consultant with extensive experience in the REC market. 

9 He’s prepared many reports for DOE and worked on these

10 issues. 

11 So, let's start off with Derik, come on up, and

12 we'll get going. 

13 MR. BROEKHOFF: Thanks, Hampton. So, I'm going

14 to start off the panel today by introducing some of the

15 basic technical requirements of carbon offset accounting,

16 by which I mean the quantification of emission reductions

17 associated with carbon offsets. A key point I want to

18 make is that there are some commonly accepted protocols

19 and procedures for quantifying carbon offset reductions. 

20 At the same time, there's not necessarily one right way

21 to do that quantification. 

22 To do that you need standards or standardized

23 methodologies, and we don't have those for large segments

24 of the voluntary carbon offset market today. I think

25 that's a key point to keep in mind when we're examining
121

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 questions about the veracity or credibility of different

2 marketing claims. 

3 Just to start off, if you're talking about

4 carbon offset standards, I want to be clear that you

5 really are talking about, in my opinion, three different

6 related parts of the equation to a carbon offset

7 standard. I'm just going to talk about the accounting

8 part. But you'll generally see, I think, five or six

9 different broad criteria that offsets need to meet in

10 order to be credible. They need to be real, surplus,

11 permanent, verifiable, and enforceable or some variation

12 on those criteria. 

13 You see those quite a lot. People tend to

14 agree on them. Of course, the devil is in the details in

15 terms of how you elaborate and specify what those

16 criteria mean. In order to do that, you need these three

17 sets of standards, the accounting standards that I'm

18 going to talk about, but also monitoring and verification

19 standards and tracking and contractual standards

20 registries and whatnot to avoid double discounting and

21 double selling, things like that. 

22 So, some others here will address some of those

23 other components, I'm just going to talk about the

24 accounting side today. Much of what I'm going to present

25 here is based on the work that my institute has done on
122

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the Greenhouse Gas Protocol Initiative. Many of you may

2 be familiar with it. This is a now ten-year-old

3 initiative, a joint initiative between WRI and the World

4 Business Council for Sustainable Development to develop

5 greenhouse accounting standards for businesses to use,

6 developed through a transparent and multi-stakeholder

7 process involving businesses, NGOs and government

8 representatives. 

9 There's two components to the GHG protocol. 

10 One concerns corporate inventories, that is how you

11 determine the emissions that your company or organization

12 is responsible for. The second is a module devoted to

13 GHG projects that is quantifying emission reductions

14 associated with specific projects, offset projects in

15 particular. 

16 If you’re familiar with the GHG protocol,

17 you’re probably familiar with the corporate side of

18 things. I'll quickly talk about that. Basically, the

19 corporate side is concerned with inventorying the

20 emissions, determining the emissions that you need to

21 reduce or offset if you're looking at offsets. Without

22 going into a lot of detail, it specifies the different

23 categories that you put those emissions into and

24 separates them by the direct emissions from sources that

25 you own or control and indirect emissions from different
123

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 sources including purchased electricity. 

2 Now, we can come back to this slide, there’s

3 some discussion can carbon offsets count against you or

4 direct emissions or your indirect emissions, what should

5 you count them against? There's some further questions

6 we can go into there. 

7 But I'm going to jump right into the project

8 accounting side of things. Basically, the project, the

9 GHG protocol project module concerns how to quantify

10 greenhouse gas emission reductions from individual

11 projects. And rather than walk through all of the

12 different steps in the GHG protocol, what I'm going to do

13 is introduce what I think are three of the most

14 fundamental basic concepts in carbon offset accounting

15 and their importance and relevance. 

16 So, starting off, I think the first key

17 concepts and certainly the most important when you're

18 looking at quantifying reductions from carbon offsets is

19 this notion of a baseline scenario that is the reference

20 point against which you're quantifying emission

21 reductions. The key point here is that for carbon

22 offsets you're looking at a forward-looking and

23 hypothetical scenario. So, in the entity context, what

24 you see on the left-hand side there, quantifying

25 reductions is fairly straightforward. You inventory your
124

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 emissions in year one, you do it again in year two and

2 you compare the results. If your year two emissions are

3 lower, you can chock up those reductions between those

4 two years. So, it's a basic historical comparison. 

5 With offsets, you have a fundamentally different

6 frame of reference. Again, you're looking at this

7 hypothetical scenario, so the procedure is to look at

8 your emissions in year one and in year two and compare

9 those emissions to what the emissions would have been in

10 this alternative scenario. So, it doesn't matter if your

11 year two emissions are lower than your year one

12 emissions. What matters is how those emissions compare

13 to this hypothetical scenario. 

14 What is the baseline scenario? There's

15 different formulations for it. In the GHG protocol, the

16 baseline scenario is what would have occurred, a

17 description of what would have occurred in the absence of

18 any considerations about climate change mitigation. Or,

19 more specifically, in the context of a carbon offset

20 market, what would have occurred in the absence of a

21 carbon offset market? 

22 So, imagine another state of the world where

23 everything is completely the same, holding everything in

24 constant except you don't have a carbon offset market,

25 what would happened in that scenario? That's the basic
125

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 challenge associated with determining baseline emissions

2 for carbon offsets. 

3 There's a flip side to this question, which is

4 this question of additionality, which is basically asking

5 would the project itself have occurred in this

6 alternative scenario in the absence of a carbon offset

7 market? If your project would have happened in that

8 scenario as well, it’s not additional, there’s no

9 difference in emissions between the baseline and your

10 project; you don't get any emission reductions. 

11 Now, there's all kinds of different methods for

12 trying to answer this question. I’m not going to go into

13 what those methods are for additionality. The GHG

14 protocol focuses on this question of estimating baseline

15 emissions. 

16 And there are basically two procedures, general

17 procedures for making this estimation. The first step is

18 always to identify what are the plausible alternatives to

19 your project, alternative technologies and practices

20 which we call baseline candidates. And then you take

21 those alternatives and assess them using either of these

22 two procedures. The first is a project-specific approach

23 where you look at the various alternatives, compare the

24 barriers facing the different alternatives, potentially

25 the benefits or pay-offs associated with them, and you
126

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 try to identify one alternative that would have been most

2 likely to occur in this alternate scenario without a

3 carbon offset market. 

4 The second procedure is what we call a

5 performance standard procedure, and that's where you

6 essentially look at all the alternatives and calculate a

7 baseline emission rate, as an average of these different

8 alternatives or a better than average emission rate. And

9 you use that to represent what the baseline emissions

10 would be for a typical project. 

11 Now, these are both completely valid legitimate

12 ways to try to answer this question about what baseline

13 emissions would have been. But a key point here is that

14 you can use either one of these procedures and come up

15 with a different answer for the same kind of project and

16 which one you choose really depends on the type of

17 project involved and those considerations which are more, 

18 I think, policy related questions, which I'll get to at

19 the end. 

20 But different marketers may be using different

21 methods to quantify their reductions and they may be

22 valid. They may both be valid and that's something to

23 consider in looking at their marketing claims. So,

24 baseline emissions are a key concept. 

25 The second key concept in carbon offset
127

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 accounting, I think, is what I would call completeness. 

2 That is, projects can have both intended and unintended

3 effects on greenhouse gas emissions. Just as an example,

4 you may have a project that involves biomass fuel which

5 has a net zero contribution to fossil carbon emissions in

6 the atmosphere, so it doesn't produce any net emissions

7 but you may have an increased emissions associated with

8 fossil fuels in the production of the biomass fuel and

9 you would want to take account of those emissions in

10 quantifying the overall emission reductions associated

11 with your project. 

12 So, all significant changes in greenhouse gas

13 emissions should be accounted for when you’re trying to

14 quantify the reductions from carbon offsets. 

15 Third key concept, monitoring and verification.

16 Monitoring is required to determine the actual emissions

17 from your projects in the project scenario. Also, in

18 many cases, to validate important assumptions about the

19 baseline scenario. So, you may make assumptions based on

20 current fuel prices, for example. If those change, you

21 may need to change your assumptions. So, you need

22 ongoing monitoring to quantify total emission reductions

23 and you don't want to count reductions before if they

24 have not been monitored and verified. 

25 So, all three of these basic concepts, I think,
128

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 are essential when you’re looking at carbon offset

2 accounting, the baseline emissions estimates, making sure

3 you have done a complete accounting of all changes in

4 emissions, and monitoring of the project to make sure

5 that it performs as expected. 

6 The key point, though, I think when you’re

7 looking at marketing claims and you’re thinking about

8 carbon offset standardization is that within these basic

9 requirements there's still a lot of open-ended questions

10 that need to be answered. 

11 I posted some of them up here. Within the GHG

12 protocol, we provide a set of general accounting

13 principles that can help guide you in answering some of

14 these questions. But absent some actual standardization

15 and some actual development of methodologies that are

16 tailored to specific types of projects that really

17 specify these questions, you're going to have some

18 ambiguity. 

19 And a key point here is that these are, in my

20 opinion, policy questions. That is, they’re the kinds of

21 questions you need to answer if you're designing a carbon

22 offset program, you’re setting standards, you’re trying

23 to balance issues like should we emphasize the

24 environmental integrity of this market in the standards

25 that we're developing at the expense of excluding some
129

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 good projects, for example, or should we try to be a

2 little more lenient, promote the development of these

3 markets, and reduce transaction costs and things of that

4 nature. How you answer these larger policy questions is

5 going to influence how you answer these accounting

6 questions. 

7 And that's a challenge I think for the

8 voluntary market. It's not clear yet who is going to

9 make these kinds of policy determinations for the market. 

10 They may get decided as this market evolves over time. 

11 But when you're looking at this question of are marketers

12 out there representing offsets correctly, credibly, they

13 have to at least have covered all the bases of these

14 three basic ideas here, the baseline estimates and so

15 forth. But there's still going to be some differences in

16 the approaches that different standards and programs are

17 taking. It's important to keep in mind. 

18 That's it. Thank you very much. I’m happy to

19 take any questions. 

20 (Applause.)

21 MR. NEWSOME: Thanks, Derik. Let's go to Jim. 

22 MR. SULLIVAN: Thanks, Hampton. I’m going to

23 apologize in advance, I have been sick for the past few

24 days, so if I'm coughing or wheezing up here, I'm going

25 to apologize in advance. But since this is an FTC
130

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 meeting, I decided to do my own survey and make it

2 audience participation. I’ve got here a common cold

3 remedy which says it reduces coughing symptoms and common

4 cold symptoms. So, every time I do, if you guys could

5 keep notes and we'll give them something else to look for

6 after this meeting. 

7 I manage the Climate Leaders Program at EPA. 

8 We have been around six years working with companies to

9 do comprehensive climate strategies. It's been road 

10 tested with greater than 150 partners from every major

11 sector of the U.S. economy. There's three critical

12 components that the partners work on: completing a

13 corporate-wide inventory, developing an inventory

14 management plan, and setting an aggressive corporate-wide

15 reduction goal. I’ll talk a little bit more about those

16 in a second. 

17 Partners report the progress annually to EPA

18 and it's a pretty big group of companies. They represent

19 about 10 percent of U.S. GDP from their U.S. revenues and 

20 emissions from these companies represent more than 8

21 percent of U.S. emissions in the U.S. inventory. 

22 Overall, a little more than half of them have publicly

23 announced goals so far, preventing nearly 50 million

24 metric tons of CO2, which is about close to nine million

25 cars, and we have 11 partners that have achieved their
131

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 initial goals. So, a lot of experience dealing with

2 greenhouse gas, inventories and offset issues. 

3 The program requirements are developing a

4 corporate-wide inventory which, as Derik had mentioned,

5 is based on the WI/WBCSD protocol that includes all

6 corporate emissions, not just CO2 but methane and the

7 other major gases. It includes direct emissions plus

8 indirect from electricity use. 

9 The second component is creating an inventory

10 management plan for credibility. So, this is a document

11 like an environmental management system where companies

12 really go through a rigorous process to describe how

13 they're building their bottoms up corporate inventory. 

14 It ensures high quality data and then EPA does some

15 desktop checks on that and actually does a site visit for

16 every one of these companies to make sure that it's being

17 well implemented at the site level. 

18 And then the final component is setting a GHG

19 reduction goal. It needs to be forward-looking,

20 aggressive for the sector, and external reductions are

21 allowed to help companies meet those goals, which is why

22 we're here today. We also have on our website, if you

23 look under that, a performance benchmarking methodology

24 that's been peer reviewed, released under ACEEE this

25 summer about how we set those performance benchmarks for
132

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the goal setting process with companies. 

2 So, just to give you a brief sampling of the

3 companies we're working with, this started out about five

4 years ago, this is a slide that showed what companies are

5 taking action on climates. It's now become sort of a

6 different message of who isn't taking action on climate. 

7 So, there's a lot of activity going on there and it’s a

8 pretty good representation of leading companies in the

9 U.S. 

10 The key points we have had on offset approach

11 with these companies is that the goal reporting -- I had

12 mentioned the three components of the program. Companies

13 are allowed to use offsets to help achieve their goals. 

14 It's different from an inventory. That's one of the key

15 points if you take away from today as good. An inventory

16 is an accounting of what your actual emissions are. An

17 offset or a greenhouse gas reduction is something you do

18 to reduce or something you do to offset those emissions. 

19 So, we feel that the goal reporting should be

20 transparent and public and you should track inventory

21 data without netting the goal tracking data. So, we have

22 four key criteria on the offset approach, real,

23 additional, permanent, verifiable, they're words that

24 people have heard I'm sure quite a bit before, and

25 Maurice will go into a little more detail about those. 
133

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 But I think the main points to take are that

2 actual reductions have occurred, additional is beyond

3 business as usual and, again, we're consistent with the

4 WI protocol but with one time of approach under it, a

5 performance standard approach, which we feel allows

6 objective data to be used to evaluate performance in the

7 marketplace. Permanent or can be backed by guarantees if

8 there's an issue about potentially backsliding or losing

9 the reductions, and verifiable, which encompasses three

10 concepts. If it can be quantified, first of all. You

11 can actually measure the project. It can be monitored. 

12 You can actually measure the changes in the project and

13 it can be verified. 

14 As we thought about developing and putting out

15 these guidelines, we thought there's two ways that

16 companies may really approach this. One is they may be

17 developing or investing in their own projects, and two,

18 they may choose to purchase offsets or registered

19 reductions or whatever the 50 separate terms for them in

20 the voluntary market are. So, we're developing

21 guidelines, and I'll talk about them in the next slide

22 for both of those types of approaches. 

23 We've also developed over the past year project 

24 accounting methodologies for six different project types,

25 which were out on the front table. They’ve all seemed to
134

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 have disappeared at this point, so they're available on

2 our website as well, which is www.EPA.gov/climateleaders. 

3 It also allows partners to develop methods for the types

4 we’ve not yet developed. 

5 The final component is EPA does an internal

6 review for the project summary and data. So, we're

7 taking verification certification component and

8 maintaining that as a government function, not an

9 external third party function. So, the fact sheet was

10 out on the table as well. It gives an overview of using

11 external reductions to help achieve a Climate Leaders

12 goal. There are draft guidelines for developing or

13 investing in offset projects, which we're currently 

14 working on that will be released hopefully within a month

15 or so, and there's also draft screening criteria for

16 purchasing greenhouse gas reductions which we're also

17 working on. So, this is the overview of the process we

18 have put together. 

19 Under the guidelines for developing or

20 investing the offset projects are those project-specific

21 methodologies I have discussed that Maurice will go into

22 a bit more detail about. The other thing we're going to

23 be developing under the more detailed guidelines is a

24 generic project protocol where companies or people in the

25 market are looking to use this type of methodology, can
135

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 use that to develop their own methodologies for project

2 types which we haven't done. 

3 And what Maurice will talk about in a bit I can

4 mention here is that doing a performance standard

5 methodology takes an awful lot of up-front work and time

6 and effort. You need to find a good data set within the

7 country you're doing things on to compare it to, and we

8 don't have unlimited personnel or resources at EPA, so

9 we're open to people developing those and bringing those

10 in for review for this program. 

11 The other thing that we've announced under the

12 purchase guidelines, and I, again, put a bunch of copies

13 of those out there, is green power purchases. So,

14 companies that are looking to go out and buy green power

15 or to buy RECs from the voluntary marketplace, the key

16 points on that are that green power is an effective way

17 to reduce the environmental impacts of electricity use. 

18 I don't think there's any controversy about that. I

19 don't think anybody said anything this morning that would

20 contradict that. 

21 The second point is that EPA has a definition

22 for green power sources. It's not a technology specific

23 definition. It’s what -- sources have a superior

24 environmental profile and no manmade emissions. So,

25 again, we're using work that some other experts at the
136

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 EPA have done for the definitional issues, and Matt

2 Clouse will be on a panel later this afternoon if there’s

3 questions on that. 

4 So, for Climate Leader’s goal tracking

5 purposes, what we’ve said is green power may be used to

6 adjust the indirect emissions from electricity use. The

7 guidance doesn't address on-site or non-grid connected

8 renewable energy. The other thing that's new here, I

9 think it was mentioned earlier, that there were average

10 versus marginal rates. There is a new E-grid data set

11 out there that has some marginal rates for various

12 regions of the countries. So, this guidance uses the new

13 marginal factors based on non-baseload emitting

14 technologies. 

15 Part of the important consideration on using

16 green power to adjust electricity emissions are both an

17 ownership consideration and an accounting consideration

18 of how accurate the actual project accounting is. 

19 The other thing I should mention we released in

20 the past year is guidance on companies using carbon

21 neutral goals, and that has a couple of components to it. 

22 One is expanding the inventory boundary to include

23 optional sources. That would be things like business

24 travel, employee commuting, product transport, things

25 that aren't required under the program requirements but
137

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 that companies could do. So, the first thing you need to

2 do is expand your boundaries if you're going to make a

3 carbon neutral claim. 

4 The second thing is achieving significant

5 internal reductions. Companies need to have a reduction

6 goal that we would be comfortable announcing as an

7 external goal for achieving their reduction. So,

8 efficiency, on-site renewables, processed fugitive must

9 meet a performance benchmarking test similar to the other

10 goals. 

11 The final component of that is purchasing the

12 external reductions either green power or REC for the

13 part that companies are not able to reduce internally. 

14 So, the key points to take away from this

15 workshop is that EPA has significant expertise on a lot

16 of these issues relating to greenhouse gas inventories,

17 reduction goals, offsets, green power purchases. We have

18 released guidance on this for offsets for green power

19 under Climate Leaders, also under our Green Power

20 Partnership. We've also released detailed accounting

21 methodologies at this point for six project types plus

22 green power purchases with, in the fact sheet, the option

23 to expand on those project types. So, I would expect

24 some more to be released in the next year. 

25 Then the final thing to take away on this is I
138

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 think marketing claims based on the use of these types of

2 methodologies should help add significant credibility in

3 the marketplace. You now have a government agency

4 responsible for the environment that has put some pretty

5 detailed guidance in place for these things and as

6 marketers begin to call companies and talk to people

7 about this, you can now say, well, do these things meet

8 the requirements that EPA has put out there. 

9 So, the other thing is that that gets you part

10 of the way, but there are still a couple of components

11 missing. Because we're doing an internal EPA review of

12 these projects for Climate Leaders, there's no provisions

13 for external verification certification in the

14 marketplace. So, companies can say we’ve met the

15 accounting principles that EPA has put out there, but

16 it's not going to be EPA reviewing that for the voluntary

17 marketplace. So, there could be opportunities there. 

18 The other thing is there's really no national

19 registry on reduction and offset-type projects. To

20 ensure double counting, you really want to make sure that

21 there's some sort of serialization of the tons, some sort

22 of upstream, you know how many tons a project is

23 generating and that they’re sold only once and retired.

24 So, that’s another thing, again, with the program and our

25 own internal review is not necessarily covered under
139

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 this. 

2 So, I just wanted to leave with those thoughts

3 and then there's some contact information for folks on

4 our staff and our team up here if you're interested. So,

5 thank you. 

6 (Applause.)

7 MR. NEWSOME: Thank you. I wanted to thank Jim

8 for coming in. Maurice told me this morning he thought

9 Jim was out sick and I was concerned because I thought I

10 was going to have to give his presentation. I don't

11 think I would do a good job. But thanks a lot for coming

12 in. 

13 All right, Maurice. 

14 MR. LeFRANC: Thanks, Hampton. Jim’s spilling

15 water and has water all over the laptop here, so I hope

16 I’m okay. 

17 I’m just kind of going to jump in now. I

18 thought the presentations this morning were excellent. I

19 thought they really sort of teed up the issue and,

20 particularly, the first two FTC presentations, which teed

21 up what the problem is, is you have a market -- and I’m

22 not sure it’s actually a market as it's just a lot of

23 individual buyers on a personal consumer level who are,

24 for the right reasons, maybe doing things that don't have

25 the consequence that they believe they may have. 
140

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 So, essentially, what I wanted to do is walk

2 through a bunch of different points. So, the elements

3 that Jim talked about, they build on what Eric had put

4 together for the WR/WBSCD protocol. 

5 At EPA, we have been involved in offsets, I

6 have been and some others on our teams since actually

7 back in the '80s when the U.S. had a voluntary program,

8 the U.S. Initiative on Joint Implementation, I think

9 Linda was involved in that as well. We then worked on

10 CDM when the U.S. was in the negotiations on Kyoto and

11 wrote a lot of the text that was used eventually for

12 Kyoto for the Marrakesh Accords operationalizing CDM. 

13 We’ve recently been working with Jim and his colleagues

14 on the Climate Leaders Program. We worked for quite a

15 while with Derik on the WRI protocol and the performance

16 standards side and others. The performance standard,

17 which I'll talk about a bit in a second, has been picked

18 up by the RGGI approach and by the CCAR approach that

19 they’ve done for some of their methodologies. 

20 So, I’m going to walk through a number of

21 different points. Again, what we're getting at, and I

22 think Jim teed the point up, is that as a government

23 agency we're not regulating greenhouse gases at this

24 point. We're not setting a standard that's a regulatory

25 standard, but we have set a standard by doing these
141

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 methodologies for the Climate Leaders Program and we’re

2 trying to maintain consistency, transparency, et cetera,

3 through that. 

4 So, I want to walk through our points that I

5 think -- the topic of the workshop is to consider what

6 the public or what the consumer should understand as

7 they're considering voluntary offsets. So, I think the

8 first thing, which I don't have on here, is really a

9 clear project description. What is the project you're

10 talking about? There are lots of different kinds of

11 forestry projects, aforestation, reforestation. Are you

12 talk about converting crop lands to forest, pasture to

13 forest, what are the consequences of what that

14 description is? So, that should be one thing that should

15 be clearly communicated. 

16 One thing that we’ve spent a lot of time on,

17 and this is the first point that I have up here, is that

18 data that’s publicly available in order to set an

19 additionality threshold, and I'll talk about that in a

20 second, and to set the baseline, it's probably the thing

21 that takes us the most time. We have used a number of

22 contractors, technical experts, EPA people, to get at

23 what is the most recent data set, what's the most

24 thorough data set. 

25 We look at the U.S., at this point, and say
142

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 what data set represents what's going on in this project

2 type in this sector across the U.S. or regionally? And

3 to me it's one of the most complicated but it's the

4 essential thing to say, if you're talking about business

5 as usual, beyond business as usual as a performance

6 standard or as an additionality test, I'm not sure how

7 you can do that unless you know what's going on around

8 that project. Again, as Jim said, we've moved in the

9 performance standard approach rather than sort of an

10 intent argument for additionality. 

11 What I'm going do when I finish with these

12 bullets is walk through a few of the project types we

13 have done which make it a little clearer. 

14 The second thing is in our work and we think

15 clearly in the offsets world the offset projects should

16 be surplused to regulation. So, we have done thorough 

17 reviews for each project type what federal, state, local

18 regulations are out there that would say one must do this

19 project because you're regulated in a manner. Again,

20 I'll fill in by talking about specific project types. 

21 The question is, how does that play in

22 advertising claims or claims for a voluntary market by

23 providers. How is that communicated? Particularly when

24 you get to the state and local level where it's not clear

25 other than walking through every possible regulation in
143

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the state, it's not clear how you do that. But it also

2 is key because our position is you can't do a project and

3 claim a reduction if it's just being done for regulatory

4 purposes. Additionality -- again, what we do is we

5 defined additionality in a performance standard, and a

6 definition we use and then operationalizes that

7 additionality represents a level of performance that with

8 respect to emissions reductions or removals or

9 technologies or practices is significantly better than

10 average compared with similar recently undertaken

11 practices or activities in a relevant geographic area. 

12 So, what we’re clearly doing is looking at

13 what's happening around the place where that project is

14 being proposed. If everyone is doing without a carbon

15 benefit, if everyone is doing a certain project type, one

16 would wonder if it would be considered additional. And,

17 again, what we look at is we separate out the

18 additionality test and baseline test. An additionality

19 test is a threshold. It’s either a technology threshold,

20 again looking at the data, what's going on in that

21 project type. So, here’s the technology that's cutting

22 edge technology that everyone is using. Therefore, if

23 you're using something that's emitting higher, less

24 efficient, then it wouldn't be additional. 

25 Practice base, and, again, I'll walk through it
144

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 quickly and some of the project types, practice base is

2 saying with's going on around you, how many people are

3 putting digesters on on farms? What's the percent doing

4 it? And then emissions rate, we look at particularly in

5 like industrial projects, what's the rate per unit of

6 output of emissions and then we set a performance

7 threshold that’s significantly better than average. Top

8 20 percentile, top 15 percentile. Again it varies by

9 project type. 

10 We also set a clear baseline and communicate

11 this. We say, for example, for a retrofit the baseline

12 would most likely be what's your annual performance over

13 a period of time? For a new project, again, it relates

14 to the data set and the additionality test that you still

15 would be expected to be compared to a baseline that’s

16 performing either at average or better than average. 

17 We also look at if you're in a capped region

18 and the sector that you're wanting to work in is a capped

19 sector, I think this could come up in RGGI right now, for

20 example, that you couldn't be doing an offset project in

21 that cap sector. I think there may be some questions

22 later about this. There may be other sectors within the

23 region which aren't capped where you could do an offset

24 project. 

25 Again, I think Jim hit a little bit on the
145

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 issue of double counting. How do you track what's going

2 on, how do you know that the credit that you bought here

3 someone else didn't buy somewhere else? Again, is there

4 a registry system? Climate Leaders would have that, but

5 communicating to the consumer how do you ensure to the

6 consumer that they're not buying something someone else

7 has already bought. 

8 The NEXA bill (phonetic), it’s well-documented,

9 reductions linked to a specific project. There are some

10 of the websites where you can look and you can say I'm

11 buying or at least you're under the impression you're

12 buying reductions from X project. There are others that

13 sort of mix a variety of offset projects or even mix RECs

14 in there. Our thrust would be that you would have to be

15 able to track back the reduction you're buying or you’re

16 claiming to a specific project. Again, it goes to this

17 data sets, the information that you're providing to

18 assure that that project actually is leading to a

19 reduction. 

20 I won't say much about validation verification. 

21 What we require in all of our methodologies, we outline

22 what the acceptable monitoring approaches would be. 

23 We're working with Jim and others in Climate Leaders now

24 on what are the program design issues around validation,

25 verification. Is the third party or EPA people? My
146

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 sense is to some degree EPA people would be involved in

2 the verification. 

3 And, again, without going into a lot of detail

4 because I’m going to run out of time is there would be

5 provisions to address leakage, and leakage for us is

6 activity shifting. So, I did something here that caused

7 an emissions over there. We require that to be

8 addressed. Permanence as well. I have done a project

9 but for some reason that project is going to disappear.

10 Generally, it's linked to forest projects, but it could

11 be in a variety of cases, it doesn't just have to be

12 forestry. There are lots of provision, insurance

13 provisions, temporary credit provisions, et cetera. But

14 one must be clear that if I bought this reduction from

15 this project that it just doesn't disappear a week later. 

16 Again, the one thing that we clearly require is

17 that there are ex post reductions. A reduction is not a

18 reduction until it occurred. So, there’s no forward

19 crediting, no forward reductions. 

20 So, I'm going to kind of walk through a couple

21 of project types just to say what we do. What we do is

22 look at recent historic data for the country and then we

23 look to see whether there are regional differences in

24 that data set. And that's again to look at our

25 definition of additionality that we’re comparing with
147

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 similar activities, similar geographic areas. 

2 It goes to the last point I think that Derik

3 was making, that there are standards and then there's

4 policy setting. So, to a degree, what we're doing for a

5 voluntary program at EPA is setting the policy and saying

6 we have methodologies, if you do a project, we will use

7 similar methodologies for purchase reductions or similar

8 expectations. 

9 So, I'll just walk through a manure project we

10 do and just quickly say what we would look at. For

11 manure management projects, we look at data sets. So, we

12 look at the U.S. EPA inventory of emissions which

13 characterizes manure management efforts around the

14 country, a census of agriculture, and then EPA's Agstar

15 program which tracks digester and manure management

16 projects. So, we define the project type as an

17 installation of anaerobic digester either at a dairy or a

18 swine operation. Jim said if someone wants to come in

19 and have some poultry operation, they could come in with

20 a methodology consistent with what we're doing with data

21 sets. We just haven't done that with what we have done. 

22 We then define for the project, we say what are

23 all the components of the boundaries? So, we have a

24 physical component. So, it’s confinement areas,

25 collection systems, et cetera. We say what the boundary
148

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 would be as far as the greenhouse gases, so we actually

2 say what are the gases you have to consider? For manure

3 management, we really don't get into leakage at all. 

4 There's not really an expectation of leakage. There are

5 no federal regulations, so that's really not an issue in

6 that project type. 

7 Additionality is practice-based. Only .07

8 percent of dairy farms and 0.2 percent of swine

9 operations have digesters on them. So, we feel the

10 practice of someone putting a digester to us is clearly

11 additional. There's no sort of incentive to do that

12 right now, or a small incentives. And, again, it's only

13 additional if you don't have a digester already in place. 

14 The baselines that we look at are the current

15 management practice. What are you doing to manage manure

16 right now? We provide detailed equations in our

17 methodologies which you could walk through and just

18 simply calculate -- first estimate and then calculate

19 your reductions and then outline monitoring. 

20 I will go very quickly to aforestation and

21 reforestation. We use data sets from USDA, the National

22 Resources Inventory. We define aforestation and

23 reforestation because we're not getting into temporal,

24 what was the land, we're looking at crop land and pasture

25 land that would be converted to forest. 
149

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Our physical boundaries, the land area you're

2 dealing with, the gases are primarily the CO2 removed

3 from the atmosphere with some consideration of nitrous

4 oxide and then emissions from the equipment or activities

5 that are involved in the reforestation. 

6 Leakage is one which we have included in our

7 approach. Again, it’s activity shifting and we’re

8 working more -- we have some default values in there for

9 different regions. What we have done here is picked the

10 regional breakdown in the NRI to say essentially what we

11 look at with additionality, again, the percentage of

12 conversion of crop land to forest is very low. We look

13 at the background rate of crop land/pasture land being

14 converted either to forest to either crop to pasture, 

15 pasture to crop, or to development. We consider that a

16 background rate and that comes into play when we set the

17 baseline. 

18 We say this is how much would be converted,

19 this is how much carbon would be stored over a 20-year

20 period. There are generally no federal regulations. So,

21 we're not really looking at a regulatory screen, even

22 though there are some voluntary compensation programs

23 that we would consider. Again, we provide detail

24 equations, we outline what monitoring approaches should

25 be used. And, again, what we're looking for is sort of
150

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 to transfer back to the topic at hand is that what our

2 expectation would be and Climate Leaders and what we're

3 doing is not to say we would pick certain providers, we

4 would pick certain reductions that are valid, we would

5 set a set of screening criteria that would track with

6 what we're talking about here and saying anyone could

7 come in and any Climate Leader partner could come in with

8 purchase reductions as long as they're following the

9 screening criteria. That was one of the to-do things

10 that Jim outlined. Thanks. 

11 (Applause.)

12 MR. NEWSOME: Thanks, Maurice. Ed.

13 MR. HOLT: Good afternoon. First, I want to

14 thank the FTC for inviting me to speak to you this

15 afternoon. I was asked to focus particularly on the use

16 of RECs, renewable energy certificates, as offsets and to

17 raise and identify particular issues out in the

18 marketplace. 

19 As you heard a little bit this morning, there

20 are a number of REC marketers or green power marketers

21 that do make carbon CO2 benefits, and certainly, there

22 are many voluntary purchasers who expect to receive or

23 expect to claim at least having produced carbon benefits

24 from their REC purchases. But what are they getting and

25 how do you prove that? 
151

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 One of the issues that actually I think Lori

2 Bird mentioned this morning was she talked a little bit

3 about differences in definitions of what a REC is. 

4 Certainly, there are -- first of all, some states with an

5 RPS generally have addressed this question. States that

6 do not have an RPS have not addressed it. But those who

7 have addressed it, there are variations in what's

8 eligible, what kind of technology is eligible, and what

9 comes with it. Most of those states say the RECs include

10 the environmental attributes, but they don't go on to

11 specify just what those attributes are. 

12 Is it specifically just the direct on-site

13 emissions, for example, or is it what I would call the

14 derived or potentially off-site emission reductions? 

15 They don't really address that, and that leads to one of

16 the key issues in using RECs as offsets is uncertainty

17 whether the REC includes an emission reduction. 

18 In an uncapped market, these emission

19 reductions could potentially be claimed by two parties. 

20 The reason is that the renewal energy generator that made

21 the investment, generated energy into the grid, caused a

22 fossil fuel generator to back off. But then there's also

23 the fossil fuel generator that reduced output on-site who

24 might also wish to claim that same reduction. Generally, 

25 the renewable energy generators are the ones that are
152

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 making the claim. 

2 Fossil fuel generators, to my knowledge, are

3 not making the claim in any marketing terms, they’re not

4 making sales of emission reductions. So, in that sense,

5 there may not be much of a conflict, but those same

6 fossil generators might be registering their emissions

7 outputs in some of these registry databases. 

8 Well, what happens is that under the greenhouse

9 gas protocol that both Derik and Jim talked about, the

10 practice is that the emission reductions assigned to the

11 fossil fuel generator as a direct or Scope 1 emission

12 reduction, while at the same time the purchaser of the

13 renewal energy may make a claim to the reduction as an

14 indirect or Scope 2 emission reduction. In a sense, it’s

15 kind of a sanctioned -- I almost don't want to say this,

16 but it might convey it better. It’s a sanction double

17 counting where because they’re in two different columns,

18 they’re in two different categories, it’s okay. It’s

19 kind of like double entry bookkeeping. You have a credit

20 over here and you have a debit over here. 

21 But that leads to some uncertainty about what

22 claims can be made. Or you have to be precise about the

23 types of claims that are made. In fact, I have seen a

24 number of renewable energy marketers or REC marketers

25 that are beginning to market their product or make their
153

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 claim in that kind of a term, that it’s indirect to

2 offset your electricity purchases. 

3 The last point on this slide that I wanted to

4 make is that the distinction may work for RECs as offsets

5 to electricity emissions, but it doesn't really clearly

6 address, at least to my limited knowledge about the

7 greenhouse gas accounting procedures, it doesn't really

8 address how RECs sold as offsets to say transportation or

9 other activities might work. Maybe it doesn't work for

10 them, so that could be a problem. 

11 In terms of substantiation of claims, I would

12 say, first of all, that for RECs -- I'm speaking for a

13 minute just about RECs only, not about offsets --

14 verifying REC claims is much easier and simpler because

15 of the fact that there are a number of state or regional

16 certificate tracking systems that have been established

17 around the country. In fact, Lori again showed a slide

18 this morning, a map of the states that showed big regions

19 that are covered by these REC tracking systems that

20 ensure that there's no double counting and that the RECs

21 sold for voluntary purchases are not also used for

22 mandatory compliance. 

23 Most of the country, as I say, is now covered. 

24 In fact, the area that Lori showed in the map from Kansas

25 down to Florida, through the southeast, there is a
154

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 proposal to establish a tracking system there as well. 

2 So, the point I take away from this is that for REC

3 purposes double counting is very unlikely. These

4 tracking systems make independent verification much

5 easier, and essentially REC tracking goes a very long way

6 to satisfy the substantiation needs for marketing RECs. 

7 But as I say, again, not specifically for offset claims

8 because the megawatt hours, they’re very clearly measured

9 by meters. They're tracked and they're pretty much

10 secure from tampering. 

11 Now, for voluntary emission reductions, they

12 may still be double counted because the emission

13 reductions are not tracked. They could be tracked,

14 there's no technical reason why the tracking systems

15 couldn't do that, but there's no policy direction that 

16 clarifies the point about who gets to make that claim on

17 the emission reduction. 

18 Another point that was raised or has been

19 talked about is this issue of additionality. This

20 morning we heard a little bit of talk about whether or

21 not the -- well, essentially, additionality as this

22 project, would it have occurred beyond business as usual? 

23 And there are a number of different tests that are

24 applied, some of them jointly, it’s not just pick one,

25 but several of them together. 
155

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Is it new? Is it additional to what is

2 mandated or what's required? The third one is this

3 financial test, would the project have been undertaken

4 without the carbon offset revenue? And the last one is

5 the one that Maurice was talking about, really a

6 performance and technology test, is it really new

7 technology or is it high performing technology that is

8 not common? 

9 This was getting a lot of debate and discussion

10 in sort of email traffic that I was seeing over the past

11 year, but I think in the last several months it seems to

12 have quieted down quite a lot. I'm also encouraged by

13 the fact that both the Center for Resource Solutions and

14 the Green-e Program and EPA have identified that

15 renewable projects are additional, A, if they're new and

16 if they meet the performance tests. It’s very difficult

17 to do this on the financial side of things because a

18 renewable project gets multiple sources of revenue and

19 it's very hard to determine which stream of revenue is

20 the one that really put it over the top, which one comes

21 first, which one comes at the last, which is the last

22 increment. It's not, in my mind, a very practical way of

23 applying the additionality question. 

24 There are other issues going more to consumer 

25 interests. There's a lot of confusing terminology out
156

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 there, at least it’s confusing to me, and if it is to me

2 I assume it is to people who don't spend a lot of time on 

3 this. We talk about offsets, we talk about emission

4 reduction credits, and there’s verified emission

5 reductions and sometimes I read that as voluntary

6 emission reduction credits. I’m not sure if there's a

7 difference. Certified emission reductions and the

8 Chicago Climate Exchanges uses these carbon financial

9 instruments. So, this terminology can be somewhat of an

10 issue that education through the FTC or through marketers

11 could help. 

12 There are multiple seals of approval. We heard

13 some of that this morning. I think we'll hear a little

14 bit more about that later this afternoon. And the

15 question of measurement, there are different ways to

16 measure the reduction, whether it's based on average

17 emissions avoided or whether it's on marginal emissions

18 avoided. I don't know that that's really a problem for

19 consumer protection because in either case whatever you

20 use as long as it can be backed up, as long as you can

21 prove it, but it would be helpful, I think, if there were

22 some more generally accepted consensus on what's the best

23 way to measure it. 

24 Finally, I just wanted to throw up an example,

25 an effort really to try to put into practice what I have
157

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 understood over the years, some of the guidelines for

2 green marketing that we have seen from the FTC. I first

3 used this slide, actually I think it was nine years ago,

4 it wasn't used quite the same way but I still called the

5 product Windex. This is not the same that you heard

6 about on My Big Fat Greek Wedding. Remember the guy who

7 is using Windex as all kinds of cures for Jim's cold or

8 anything else? But it's Windex to indicate that this

9 wind product doesn't include everything that you might

10 imagine. 

11 So, this one is specific, first of all, it says

12 reduce your greenhouse gas footprint. Then have this

13 little asterisk that hopefully isn't too small type that

14 says something that consumers won't understand anyway,

15 but at least it’s specific, it says, provide Scope 2

16 emission reductions per the greenhouse gas protocol. And

17 it further clarifies that this product Windex supports

18 wind energy projects fortified with carbon reductions. 

19 So, it's carbon reductions, it's not NOX, it’s

20 not SOX, the other kinds of emissions that might come

21 along with generation for various reasons that are not

22 included. So, because you don't want to give a general

23 impression that all this stuff is being avoided, you have

24 to have the footnote that says carbon is a principal

25 greenhouse gas, it just explains what that is, but it
158

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 does not include sulfur dioxide and nitrogen dioxide

2 reduction benefits. 

3 Then there are a couple of other things you

4 could throw in there such as certified by Safety REC,

5 which is just something that we made up, thank you,

6 Hampton. And independently verified and maybe that --

7 you know, for people who don’t really know enough about

8 that, they say, oh, Safety REC, I know about them, that's

9 good enough for me, I don't have to do all that

10 investigation. 

11 Finally, another point that was made this

12 morning, I think in one of the first presentations, to

13 point out the location of this. The wind generators, in

14 this case I’m saying it’s located in Oregon, but the

15 environmental benefits for carbon emissions are global. 

16 So, it doesn't really matter where it's located and you

17 still get those benefits. 

18 So, with that, I would like to close and I

19 think we’ll be ready for questions. Thank you. 

20 (Applause.)

21 MR. NEWSOME: Thanks, Ed. 

22 Let's start off with a short discussion about

23 cap and trade because we had some questions this morning

24 on that that we didn't get a chance to get to. I was

25 wondering if you all could discuss the intersection
159

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 between the mandatory markets and the voluntary markets,

2 and in the REC market, we're generally talking about RPS

3 standards, but in the offset market there is a lot of

4 discussion about potential cap and trade in the future. 

5 What I would like to do is impose on Maurice,

6 if he could just give a very short discussion or

7 explanation of what cap and trade is because a lot of you

8 know a lot about that, but some of you may not know as

9 much. So, Maurice, if you could kick it off and then

10 after that if anyone else has something they want to add

11 on that, that would be great. 

12 MR. LeFRANC: Thanks, Hampton. There are

13 probably a lot of people in the audience, I know several

14 of them, who know a lot more about cap and trade and work

15 a lot more than I do, but I'll give sort of a quick

16 overview. 

17 Hampton asked me to just sort of give a quick

18 what is cap and trade. I guess the best place to look

19 right now is in some of the legislation that's come off

20 the Hill in the last year or so. I guess traditionally a

21 cap system with trading, offsets was at best the orphan,

22 kind of the pure cap and trade people, I don't think

23 really had a lot of sort of need or desire to have

24 offsets introduced into the system. But in the recent

25 legislation, I think almost all, if not all, has offset
160

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 provisions or some provisions like that. 

2 So, in cap and trade, the system sets a cap, it

3 picks an amount, picks a year, X percent of 1990 base

4 year by 2020. You would then look at, well, what sectors

5 within that system are you going to cap? And there are

6 certain sectors that are easy to measure and monitor. 

7 You could cap those. There are other sectors which

8 aren't so easy to measure and monitor. They may be sort

9 of -- which is the way I think the legislation is playing

10 out is that they may be good candidates for offsets, and

11 then there are things sort of in the middle called set12 asides, where you're taking part out of the cap, the

13 allowances, or however you do it, and maybe addressing

14 certain sectors, for example energy efficiency or some of

15 the agriculture projects which are sort of difficult on

16 the cap side or on the offset side. 

17 Then one decides whether one does an auction

18 for whatever the allowances would be for the cap or you

19 look at an allocation based on historic emissions and

20 then once the system is set up, participants buy, sell,

21 trade. So, what happens to the voluntary market I think,

22 again, it goes sort of to what some people talked about

23 this morning. Are you talking about the 20 percent which

24 is sort of this consumer market with the warm glow as the

25 speaker said this morning? Or are you talking about the
161

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 -- I think Kate teed up 80 percent which is corporate

2 which is maybe buying and participating, anticipating a

3 future system. So, where do offsets and RECs fall out? 

4 So, I'll defer and let somebody else finish. 

5 MR. NEWSOME: Anyone else want to jump in on

6 that? 

7 MR. HOLT: I would. One of the comments made

8 this morning was that if a cap and trade system is

9 adopted, the use of offsets would then be moot. Most cap

10 and trade programs include a provision for a specific

11 type of offset under the cap and trade program where they

12 narrowly define what an offset is, what's eligible. So,

13 there would still be some form of offsets in there. 

14 But, in addition, there are still people who

15 will want to do things that are additional to what's

16 mandated by the cap. So, for example, if there are

17 individuals or corporations who are not under an

18 obligation to reduce, they may still want to do more to

19 make a difference. And if I understand the greenhouse

20 gas accounting principles, in fact, one that Maurice put

21 up there said something like there can still be offsets

22 as long as they're not under the cap. 

23 Well, the renewable energy sector or the power

24 sector would be under a cap, but consumers could still

25 buy renewable energy certificates and make claims if
162

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 their actions are recognized by the cap and trade program

2 and allowances are retired as a result. A specific

3 example of that that is currently in the regional

4 greenhouse gas initiative program, or RGGI program, that

5 allows states that are part of that to retire allowances

6 on behalf of voluntary demand for renewable energy. And,

7 so, in that sense, while they might not technically be

8 offsets, they do enable consumers to make those purchases

9 of RECs and still make carbon claims. 

10 MR. NEWSOME: Derik. 

11 MR. BROEKHOFF: Just to quickly follow up on

12 that. I think the key concept here is that if you have a

13 cap on a set of sources and there’s any scarcity in that

14 system, in other words without the cap emissions would be

15 higher than the total number of allowances, the emissions

16 in that system are going to tend to rise to the level of

17 the cap. So, if you undertake activities such as

18 renewable energy generation that would reduce emissions

19 from certain sources at a certain point in time under

20 that cap, it's going to free up allowances, someone

21 somewhere is going to buy that allowance, the overall

22 emissions for the year are still going to rise to the

23 total of the cap. 

24 So, it's hard in that circumstance to be

25 claiming that you're reducing emissions. The emissions
163

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 are going to rise to the level of the cap and that's why,

2 as Ed was pointing out, for an emission reduction claim

3 to be credible you have to have this retirement of an

4 allowance under that system. 

5 MR. NEWSOME: Jim?

6 MR. SULLIVAN: Just to quickly echo that, there

7 are a lot of people like under the SO2 program, schools 

8 buying SO2 allowances to retire on behalf of cleaner 

9 air. That’s an actual retirement. It’s a nationwide

10 cap, it’s coming from a source, and you can be sure that

11 one ton of allowance you’re retiring is equal to one ton

12 of reduction in that cap level that's actually emitted. 

13 MR. NEWSOME: Let's talk for a few minutes

14 about additionality. We've touched on that several times

15 today. It is an issue. There are different opinions

16 about how to define additionality, and Ed mentioned that

17 he thinks some of the discussion is changing a little

18 bit. I'm interested in whether other panelists here feel

19 the same way. 

20 So, I would like you to just comment on the

21 different approaches out there. Maurice and Jim have

22 talked about the approach that EPA has been developing

23 recently on it. And Jim moved the microphone over to

24 Maurice. But one thing that you may not have an answer

25 for, but something that we're very interested in, and
164

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 that's whether there is any notion of what a consumer

2 would expect in terms of additionality. If there's no

3 express claim about additionality given, what would the

4 average consumer expect? Are they expecting this product

5 makes a difference in some way and has anyone looked into

6 that at all? Any thoughts on additionality? Maurice? 

7 MR. LeFRANC: I don't mind starting. For us

8 under Climate Leaders, it's easier to deal with

9 additionality because what we can say is we’ve defined it

10 for the Climate Leaders Program. Now, for a general

11 claim for consumers that something is additional, I'm not

12 sure it's quite that easy. So, I'm not sure the consumer

13 actually should be concerned about being additional other

14 than the fact if they're buying what they expect is a

15 real reduction, that there's an emission somewhere,

16 either their own emission or someone else's and they

17 bought something from a project that, at the least, it's 

18 zeroing out net. 

19 So, to me, that's additional for a consumer. 

20 So, I'm not sure whether you have to make an explicit

21 claim that my projects and my portfolio are additional as

22 much as it's an implicit claim that if it's a reduction,

23 it should be something that -- you know, pick whatever

24 definition would not otherwise occur beyond business as

25 usual, et cetera, et cetera. I think getting hung up --
165

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 I think Ed's comment that it’s calmed down, I think that

2 people have just gotten tired of sort of talking about

3 additionality theoretically or in the abstract because

4 there's no answer. It's something different. Financial

5 intent, barrier tests, et cetera. It's not really until

6 you put it operationally in a policy or a regulatory

7 program that it really then has a meaning. 

8 So, I think across all sorts of providers, I'm

9 not sure there's really a meaning for additional, but

10 other than the reductions, I mean, I think the principles

11 Derik put up, real measurable, the same set of principles

12 everyone is using. That's what’s key. 

13 MR. NEWSOME: That’s very helpful. Anyone

14 else? Let's go with Ed. 

15 MR. HOLT: I’d just like to -- well, I guess

16 I’ll express an opinion and then I’ll state what I think

17 is a fact. My opinion is that many consumers do expect

18 their purchase to make a difference. Otherwise, they

19 wouldn't spend more money for it. So, making a

20 difference means that it's additional to what would have

21 happened otherwise. The debate is about how you

22 determine what's additional, not whether or not consumers

23 expect it to be additional. That's my opinion. 

24 The fact is I don't think there is any consumer

25 research specific to this issue that is generalizable,
166

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 widespread, based on any large sample or anything like

2 that. So, I think that’s yet to be undertaken. So, I

3 wouldn't want you to reach any conclusion based on

4 opinions that many of us do have. 

5 MR. NEWSOME: Okay. Let’s go with Derik and

6 then Jim.

7 MR. BROEKHOFF: I second Ed's opinion,

8 basically. I'm not aware of any market research out

9 there, but I think there is a general expectation among

10 consumers, retail purchasers in particular, that their

11 payment is making a difference that is implicitly there

12 is some connection between purchasing an offset and a

13 reduction occurring. 

14 I think, in concept, that's what additionality

15 is. You're really trying to figure out, again, sort of

16 on a theoretical level, did the payment make a

17 difference? And to generalize that, would this project

18 that's reducing emissions have happened in a situation

19 where you have no carbon offset market? The issue, of

20 course, is that's easy enough to describe in concept or

21 theory, the question is how do you test for

22 additionality. That's where I think probably most

23 consumers don't have a clear expectation. It's something

24 that's been debated among the cognizante (phonetic) for

25 years. 
167

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 There are different approaches to how you

2 answer this question about what would have happened or

3 would the project have happened anyway. And many

4 legitimate approaches -- I think the approach that the

5 EPA has taken is a perfectly valid approach. 

6 The one thing that I would admonish I guess is

7 that in proposing different additionality tests or

8 rejecting certain tests, you still have to keep your eye

9 on the prize, that is this underlying idea of what

10 consumers are expecting, is the payment making a

11 difference. And the test has to have some bearing or

12 relevance back to that question in helping to answer that

13 question. 

14 MR. NEWSOME: Thanks. Jim. 

15 MR. SULLIVAN: I think those are all good and

16 valid points. The one thing to remember in all this is

17 in inventory and doing what emissions are is an

18 accounting call. And when WRI did the GHG protocol, it

19 was pretty easy to come to consensus on how you measure

20 what an emission is. But coming across as a reduction is

21 a policy call. It's a lot more difficult to value what

22 not having that emission from the smokestack could be,

23 and if you do a poll of 100 consumers, I think you could

24 probably range from one person saying until you knock the

25 smokestack down it's not good enough to another person
168

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 saying every time I flip a light switch or decide to walk

2 to the store instead of drive, I've done something

3 different than I otherwise would have, so it's good

4 enough for me. 

5 So, what we've tried to do with this is at

6 least turn our policy calls based on objective publicly

7 available data, so that everybody out there can see the

8 data set, you can see what's going on in the market, you

9 can see where we have made our cut off, you know, needs

10 to be 50 percent or 75 percent better. There's a lot of

11 history in this at the EPA. We started with Energy Star

12 back in '91 or '92, identifying the top 25 percent of

13 performing products in a certain product category. 

14 I think when you get to a sophisticated

15 corporate purchaser, who Maurice and some others have

16 mentioned, about 80 percent of this market is probably

17 corporate purchasers at this time, it can be a little

18 more complicated message. When you get to a consumer, it

19 needs to be a pretty simple here is a label, here is

20 something that shows you that. 

21 One thing I will point out I didn't mention in

22 my presentation is that there were a couple of slides

23 earlier about the concept of additionality as relating to

24 renewable energy markets. In our sheet out there, we

25 have a data set in the country showing renewable energy,
169

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 it’s listed under the EIA data as the other renewables

2 category, it's 2 percent of existing capacity. A lot of

3 that is put into place due to RPSs and other regulatory

4 policies, and we’re up here fighting over whether one

5 wind turbine or another one is additional. If you pull

6 back a second and look at the big picture, come on,

7 people, it's good projects, it’s helping the environment,

8 and people are not choosing whether to invest in one wind

9 project or a turbine next door. They can choose to

10 invest in coal, they can choose to invest in natural gas,

11 they can be putting those resources into looking at

12 future nuclear. It's power generation that's the key

13 there. 

14 So, when you look at it that way with kind of a

15 data set to back it up and see that, I think these

16 individual arguments about the specific projects become a

17 little more put in perspective. 

18 MR. NEWSOME: Okay, well, thanks. That's very

19 helpful. We just have a minute here, so to segue to our

20 next session Janice is going to do certification, we have

21 two questions that were from the audience that were very

22 good segues and whoever asked them can pick up a

23 LumaGreen light bulb afterwards. 

24 But the question was, they both basically

25 related to the nexus between the EPA Climate Leaders
170

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Program, the protocols you have, and existing third party

2 certification programs that are out there and whether the

3 participants in your program have to follow both or

4 whether they can get credit for following other

5 certification programs. 

6 MR. BROEKHOFF: I think we're pretty clear on

7 the fact sheet on that. We have done some road testing

8 and benchmarking that we're not ready to make public yet,

9 but I think the gist of what we're starting to find is

10 that even if you use two similar methodologies that on

11 their surface appear very similar, very quickly the 1 and

12 2 percent differences on a lot of the assumptions like

13 combustion rates and the things that you wouldn’t think

14 about add up to a very different number for overall

15 project reduction tons. 

16 So, what we have said at this time in the fact

17 sheet and in the methodologies that if companies under

18 Climate Leaders want to use external reductions, the

19 project that they're purchasing from needs to be

20 evaluated using our accounting methodology and it needs

21 to have the total number of tons certified using that

22 particular methodology. So, as I have said, we only have

23 six to seven methodologies out there at the moment. 

24 We're planning on working on some more. And there is a

25 provision for companies or for marketers or people who
171

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 want to use those to come in with their own

2 methodologies, their own data sets that are consistent

3 with that and do that. 

4 But I think one of the dangers of the market is

5 having certification or review that allows five different

6 methodologies for a landfill gas project and what you are

7 going to end up with in the market is people shopping for

8 the most lenient methodology. They might all be fairly

9 similar, it might be something as simple as the global

10 warming potential. Somebody is going to use the SAR

11 value of 21, somebody is going to use the TAR value of 23

12 which is more recent but not based on the framework

13 convention negotiation. 

14 So, at the moment, we're certainly thinking

15 that companies in Climate Leaders should use our

16 methodologies, it's not to say anything about companies

17 outside of that or what consumers are buying because

18 there's very valid reasons for some of those choices, but

19 we wanted to eliminate as much as possible that shopping

20 for the most lenient methodology. 

21 MR. NEWSOME: Okay, all right. 

22 MR. LeFRANC: I just want to add really

23 briefly, it's hard to tee up if you think about how many

24 pieces of legislation have come out in the last year on

25 cap and trade, how many companies are participating in
172

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 programs like Climate Leaders, there's something longer

2 term out there and I think from our perspective we have

3 to be careful what's teed up for the longer term. And I

4 think that companies would be clear that they're

5 participating Climate Leaders, registries, et cetera,

6 anticipating what comes next. So, I think for our

7 program we're trying to make sure that internal to our

8 program, we're being consistent. But I don’t think that

9 affects sort of the consumer side, the 20 percent that I

10 think is the consumer purchases. 

11 MR. NEWSOME: Okay. Well, I want to thank the

12 panelists. I think this was very useful, and we'll meet

13 back at 2:30. 

14 (Applause.)

15

16

17

18

19

20

21

22

23

24

25
173

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 SESSION 4: CERTIFICATION PROGRAMS AND 

2 SELF-REGULATORY EFFORTS

3 MS. FRANKLE: Good afternoon. and welcome to

4 Session 4: Certification Programs and Self-Regulatory

5 Efforts. I'm Janice Frankle, I’m an attorney in the

6 Division of Enforcement and this session's moderator. 

7 We have three very insightful speakers for this

8 session: Mario Teisl, Jennifer Martin and Ian Carter. 

9 Mario will be our first presenter. Mario is a

10 Professor in the School of Economics at the University of

11 Maine. Mario will be discussing the costs and benefits

12 of certification programs. 

13 Jennifer will be our next presenter. As 

14 Director of Certification and Analysis at the Center for

15 Resource Solutions, or CRS, Jennifer oversees the Green-e

16 Energy and Climate Certification Program. Jennifer will

17 be discussing CRS’s Green-e Certification Program and

18 certification programs in general. 

19 Ian is our final presenter. Ian is the North

20 American Policy Coordinator for the International

21 Emissions Trading Association, or IETA. IETA, along with

22 two other non-profits, developed the voluntary carbon

23 standard which Ian will discuss. Thank you. 

24 Mario. 

25 MR. TEISL: Thanks, Janice. I'm going to get
174

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 right into it because I'm condensing an hour into ten

2 minutes apparently. So, even though it's sort of labeled

3 like Matt's earlier presentation, this is where we're

4 going to take a different road here. He was talking

5 about the economics and the social cost standpoint. I'm

6 going to look more at the business side of things. 

7 I have a slide up here with a lot of labels

8 here, but it's more to differentiate what I'm going to

9 talk about and what Al Levy talked about and some others

10 had talked about this morning. I’m not focusing so much

11 on the information provision part of eco certification

12 programs, I'm going to focus more on the certification

13 part of these certification programs. However, I want to

14 note that how these programs are designed and

15 disseminated wherever affects both the costs and benefits

16 to the firm and to society. 

17 Some of the relative metrics that affect these

18 are whether it's a private or a public program, whether

19 it's a single attribute like energy efficiency versus a

20 multi-attribute program, whether it's government or not,

21 whether it's mandatory or not, and whether what I would

22 say is it's partial or full, meaning does it only look at

23 one part of the production process, the certification

24 only, or is it a life cycle cradle to grave analysis? 

25 So, what are the benefits of certification? 
175

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 The first bullet is primarily something that Matt talked

2 about and Alan talked about and some others have talked

3 about is how it affects consumers and consumer utility. 

4 I'm going to focus more on the second point and some

5 other points later. And that is how does it affect

6 firms? What is it about certification programs that

7 provides an incentive for firms to do these programs and

8 what are the disincentives to performing these programs? 

9 Some of the incentives for a firm is that they

10 can increase the revenues, which includes changes in

11 prices and/or sales. It can improve the corporate image,

12 I think Matt had mentioned that earlier. And I'm going

13 to use the word “halo effect” because I'm going to use

14 that later. And, also, it can improve management in

15 terms of cost or risk reductions. 

16 Now, in terms of the importance, there's

17 actually not a lot of really good cost and benefit

18 studies out there on certification. Most of them are

19 cost savings analysis, things like that. But from some

20 survey research firms that have done certification, most

21 of them, about two-thirds of them said the reason they

22 did it is to improve their corporate image. It was not

23 necessarily to increase revenues. In fact, only about 50

24 percent of firms that were interviewed indicated that

25 they had any increased -- no, I'm sorry, only 17 percent
176

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 of firms indicated an increase of revenues. 

2 Now, I had mentioned earlier that revenues has

3 to do with changes in prices and/or changes in sales. 

4 Now, I want to differentiate something and provide a

5 little more evidence about revenues. In some areas, we

6 have found increases in prices. If you look at organic

7 and fair trade certifications, there have been some

8 documented price increases or price premiums. However,

9 in the forest products market, there's almost no evidence

10 of a price premium there. 

11 Related to sales, I want to point out there's

12 two different phenomenon in terms of increase of sales. 

13 One I would say would be consumer-driven and I would call

14 that an increase in market share. The other one is more

15 retailer-driven and I would call that increase of market

16 access. There's been a recent phenomenon in the last

17 decade or so of very large retailers being able to impose

18 quality constraints on suppliers that they could not do

19 before and that's partially linked to the size of the

20 retailer like Target or Wal-Mart or McDonald's, Home

21 Depot. It also has to do with the increased technology

22 and traceability in doing identity preservation in the

23 supply chain management. So, anyway, there's these

24 technology changes and size of firm changes that have

25 affected this. 
177

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 In terms of improved management, in terms of

2 cost and risk reductions, we’re talking about actual

3 costs of operation or reduced risk, liability risks due

4 to emissions, reduced future regulatory risks and reduced

5 healthcare risks and, again, a survey of firms showed

6 that only about half of the firms that have done

7 certification saw actual cost reductions. About a

8 quarter of them saw cost increases in production, and the

9 remaining about 20 percent or so saw no change in cost. 

10 Cost of certifications are hard to get a handle

11 on empirically because there's a lot of costs that

12 traditionally are not counted in some of these studies. 

13 First of all, standard setting and enforcement

14 strategies, that has to do more with the design of these

15 things. Those are things that have been taken on by

16 government agencies or non-profits for the most part and

17 not by the firm. So, really some of those costs aren’t

18 being covered. 

19 The actual compliance and certification efforts

20 are covered in terms of firm costs. Search and

21 transaction costs due to the certification offered or

22 not, this has to take into account that maybe a producer

23 now has to search for new suppliers or that kind of

24 thing. Labeling, marketing and outreach costs, if the

25 firm that certifies actually chooses to participate in
178

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 those. 

2 And then there's this opportunity cost and in

3 some sectors of the market these opportunity costs do not

4 show up in the analyses, but for those that have done 

5 them, they are quite large often. Opportunity cost 

6 means that when you start maybe having to impose

7 segregation of your product lines, you have now lost the

8 ability to shuffle production across factories or

9 different parts of the factory because some parts are

10 certified only, some places are not. So, there's a

11 reduced flexibility. Some storage units will be emptied

12 because they can't be used because the certified stuff is

13 not in there. They can't shuffle production that way. 

14 There's also some financing and things like that that

15 also go in there. 

16 Some of the agricultural markets have shown

17 opportunity costs to actually be higher than all the

18 other costs combined. Examples of some of these costs

19 that are included or may be included as part of the

20 actual certification is you have the typical hard costs

21 or conventional costs, new equipment you have to

22 purchase, new storage units, new structures. You have to

23 hire new people. You have to pay for the actual

24 certifying inspection to come in. But there's a lot of

25 soft costs that are not included often in some of these
179

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 studies. These are all the costs that the firm has to

2 take into account before they get certified. 

3 So, some of these certifications that companies

4 have to start a year to a year and a half in advance

5 because they have to start changing their documentation,

6 their reporting, their monitoring of things, they have to

7 maybe do some environmental studies and some modeling,

8 they have to plan how they're going to do things

9 differently. They have to do all this stuff before they

10 get through the certification process, and often those

11 costs are not included. 

12 Some of these cost determinants have already

13 been highlighted in the previous panel. They didn't talk

14 about the costs per se, but they talked about differences

15 in stringency levels and things like that. 

16 One thing that wasn't picked up on and I'll

17 mention that has a significant effect on costs is the

18 size of the firm or the project. In some of my work that

19 looked at forest certification, you find there's real

20 economies of size with these certification programs

21 because a lot of these costs, the planning, all of those

22 up-front costs are basically fixed. You have to do them

23 whether you're a small firm or a big firm. 

24 To give you some examples, if you are

25 certifying a 50,000-acre forest, your per-acre
180

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 certification cost runs about 50 cents. If you're doing

2 that for a 5,000-acre forest, you're talking about 950

3 per acre. So, you can see there's some real impacts

4 there. 

5 This last slide just points out there are other

6 market costs that may not be directly affecting the firm. 

7 You have got some trade impacts. You have got some real

8 market power and structural impacts. For example, the

9 example with the economies of scales argument, you have a

10 lot of smaller producers not being able to participate in

11 environmental certification because it’s so costly on a

12 per-unit basis and they can't compete. 

13 Trade impacts are also similar because you have

14 smaller producers in lesser developed countries plus you

15 don’t have the capital and human capital infrastructure

16 for a lot of the monitoring and enforcement efforts. So,

17 even if you are a bigger producer in the lesser developed

18 countries, you don't have the governmental support

19 systems and enforcement systems to allow you to

20 participate. And we’re done.

21 (Applause.)

22 MS. FRANKLE: Thank you, Mario. Jennifer will

23 be our next speaker. 

24 Let me just remind you if you have questions,

25 please fill out question cards and there are folks out
181

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 there to collect them. Thanks. 

2 MS. MARTIN: Thank you, Janice, for the

3 introduction. Can everyone hear me? My voice is going a

4 little bit, so just raise your hands if I start to fade. 

5 I'm Jennifer Martin from the Center for

6 Resource Solutions. The Center for Resource Solutions is

7 a non-profit organization. We’re located in San

8 Francisco, and we run a variety of programs. The reason

9 I'm here today is that one of the programs that we

10 administer is the Green-e Program. And Green-e is a

11 certification program. We have been running Green-e

12 Energy for ten years, which certifies renewable energy

13 products sold in the voluntary market, and early this

14 year, we're going to be starting Green-e Climate which

15 will be a consumer protection program that applies to the

16 offset industry. 

17 Just a little overview on how the Green-e

18 Program is run. The Center for Resource Solutions is the

19 program administer of the Green-e Program. We have an

20 independent governance board that’s comprised of a

21 variety of environmental consumer protection

22 organizations and other experts in the field who make the

23 final determination on our policy. And whenever we make

24 changes to a standard or significant policy changes to

25 how we run our program, we open up those changes to a
182

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 broad stakeholder review process and stakeholder comments

2 are brought to the board before the board makes a final

3 decision on whether or not to adopt that policy change. 

4 We also allow our program participants, so

5 those are utilities and marketers whose are participating

6 in our program, to have a non-voting member on the board

7 so they can voice concerns that are industry-specific and

8 how well the program is working with what they're doing

9 in the marketplace. 

10 I'd also like to add that we recently joined

11 ISEAL, which is the International Social and

12 Environmental Accreditation and Labeling Alliance. This

13 is an international non-profit that's aimed at promoting

14 best practice in the development of certification

15 programs in social and environmental labeling, and they

16 promote a variety of activities among their members that

17 include the involvement of stakeholders and just adhering

18 to best practices when you’re developing environmental

19 certification programs. 

20 I'll give you a quick overview of the Green-e

21 Program. This is a consumer protection program for

22 renewable energy products sold in the voluntary market. 

23 We have been around for over ten years now. We certify

24 three product types, renewable energy certificates,

25 renewable electricity sold in markets where there's
183

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 competitive retail or wholesale markets, and also utility

2 green pricing programs. 

3 The Green-e Program provides three main

4 functions. First, our standard defines what is eligible

5 to be called a renewable energy product in our program so

6 that includes which resources qualify, what vintages they

7 need to be, what year the facilities were built, so

8 really old facilities can’t participate in the program. 

9 We have specifications about no double counting. If a

10 renewable energy is used for compliance with an RPS, for

11 example, you can't also sell it in the voluntary market,

12 and a variety of other specifications in our standard. 

13 We conduct annual verification of all the

14 products that we certify, so we require independent third

15 party audits of all the companies who are participating

16 in our program to ensure that supply equals sales, they

17 did no double selling and that they gave customers what

18 was promised. 

19 We also do marketing and compliance review of

20 these companies. We have a code of conduct which

21 requires that certain disclosures be made to all their

22 customers, including provision of a product content label

23 to the customer and disclosure of standard terms and

24 conditions and price to customers when they’re making a

25 purchase and we review those materials twice a year to 
184

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 ensure that companies are being accurate and full in

2 their disclosures. 

3 Also, we review all of their marketing

4 materials, so we require that they submit all their

5 brochures, print, radio and television advertising to use

6 and we review them, one, for compliance with our code of

7 conduct and, also, if we think that they may be running

8 afoul of FTC guidelines or the National Association of

9 Attorney General guidelines on environmental marketing,

10 we tell them and make suggestions about how they can

11 improve their communication about their product. 

12 Just quickly, this is similar information to

13 what was presented this morning by Lori Bird. This is

14 just a history of the quantity of renewable energy

15 products that we have certified over the years. The

16 scale is in megawatt hours. You can see when the program

17 first started we were certifying entirely competitive

18 electricity products, and as the market has evolved,

19 we’ve moved to a program now where the majority of what

20 we're certifying are renewable energy certificates which

21 are being sold separate from the electricity. 

22 Moving on to Green-e Climate, which I think is

23 of more interest to the crowd based on questions so far. 

24 This is a program that we're going to be launching early

25 this year. It's a consumer protection program just like
185

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Green-e Energy, but this one is aimed at greenhouse gas

2 emission reductions or what is normally called offsets. 

3 We will certify offset products sold at the retail level,

4 so companies such as Terrapass or carbonfund.org or other

5 sellers who sell offsets at the retail level could choose

6 to join our program if they wish to. 

7 We have been developing the standard and the

8 program documents for the past almost two years. We

9 began working with an advisory group in mid 2008 to sort

10 of scope out what market needs there were, where there

11 were consumer protection issues that weren’t already

12 being filled by other organizations. In December of

13 2006, we released our first draft of our standard. Since

14 then, we're now in our fifth stakeholder process and the

15 development of the program, which will be ending this

16 month, and then shortly thereafter our board will meet

17 and assuming all goes well, we'll be able to start

18 certifying products within the next month or two. 

19 So, what functions is Green-e Climate going to

20 provide? First, we’re going to require that all

21 greenhouse gas reductions sold by companies who certify

22 their products with us are independently certified to be

23 real, verified, permanent, enforceable, and additional. 

24 We’re going to do this by partnering with organizations

25 who perform this. There are a variety of organizations,
186

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 some of which we've heard about already today, that

2 certify at the project level to ensure that offsets are

3 being created and that they meet additionality criteria

4 and aren't double counted. 

5 We’re also going to verify that consumers get

6 what they pay for, so we'll be requiring marketers who

7 participate in our program to undergo a third party audit

8 each year where we'll go through their books, look at all

9 of their sales records, look at contract documents and

10 records from registries to ensure that they have

11 purchased offsets in the type and quantity that they

12 promised their customers. 

13 And, finally, we're going to require a series

14 of disclosures be made by the marketers who participate

15 and our customers that include telling consumers where

16 the offsets are sourced from, giving links to the

17 programs that certified each offset project so if

18 consumers wish to know more about how that project was

19 evaluated, including what additionality tests were used,

20 they can find out and, also, general information about

21 what offsets are, and then a standard product content

22 label which will include basic information about what the

23 offset is. 

24 This diagram is a simplification of how the

25 offset market works. I think we've talked about portions
187

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 of this today. I just wanted to reiterate there's sort

2 of three stages in how this market is functioning. First

3 is the offset activity or the project. So, this could be

4 anything ranging from renewable energy or energy

5 efficiency to methane capture or a forestry project. 

6 There is a certification or validation step that needs to

7 take place here to ensure that the project is additional

8 and to quantify the amount of emission reductions that

9 are produced by it. 

10 These emission offsets are then sold to vendors

11 or marketers, and the marketers will often source offsets

12 from a variety of projects and often projects certified

13 by a variety of different organizations. The marketer

14 then bundles these together to create a product and that

15 product is sold to the end consumer. 

16 So, Green-e Climate will come in first by

17 identifying which of the project certifiers meet the

18 standards in our criteria, and secondly, by auditing the

19 vendors to ensure that they bought and supplied their

20 customers what was promised. 

21 The third area is the consumer claim, once a

22 consumer buys an offset, what can they say about what

23 that means for their corporate environmental performance

24 or their individual performance as a member of the global

25 community? And, right now, there are a variety of
188

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 organizations who have put forward carbon neutral-like

2 standards or are certifying people to be carbon neutral,

3 but there hasn't been any broad international consensus

4 about how to define what is a meaningful claim from a

5 corporate or a consumer perspective. 

6 We have been in conversations with some other

7 NGOs here and internationally about trying to develop

8 international standards on that, but it's still in its

9 infancy and we’d be very interested in helping to move

10 that conversation forward. 

11 Just to give a context for some of the other

12 certification programs that have been mentioned, in Box 1

13 this includes programs like the offset certified by the

14 Chicago Climate Exchange, EPA’s offset protocols, the CDM

15 gold standard, the voluntary carbon standard. The

16 California Climate Action Registry has some offset

17 protocols. I already mentioned the voluntary carbon

18 standard. There are others, so there are a whole variety

19 of organizations that work in this area, number one,

20 which is certifying at the project level. 

21 To our knowledge, there's no other organization

22 in the United States right now who is looking at

23 certifying the product that the vendor is selling to

24 consumer. So, that's where we’ve tried to focus our

25 effort is to fill that gap in the marketplace right now. 
189

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 I think my time is up, so here is my contact

2 information. All the materials that have been developed,

3 including all the stakeholder comments we have received

4 in the development of these programs, are posted on our

5 website. So, if you would like to get more information,

6 the website is listed here or you could contact me by

7 email or phone. Thank you.

8 (Applause.)

9 MS. FRANKLE: Thank you, Jennifer. Ian is our

10 final presenter. 

11 MR. CARTER: Good afternoon, everyone, and

12 thank you for the opportunity to speak today. Despite

13 the time constraint, I want to take a quick detour on

14 what I was going to say to be absolutely clear on what

15 the VCS is not, and that runs to a comment about carbon

16 neutral. 

17 The VCS really has nothing to say directly to

18 the claim of carbon neutrality. What the VCS is is a

19 standard entirely focused on the common currency of the

20 market, the ton. The fundamental intention of the

21 standard in developing was to address the problem of a

22 real plethora of conflicting information and

23 fundamentally confusing information in the market. 

24 Ecosystem Marketplace and New Carbon Finance

25 did an excellent report last summer about the state of
190

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the voluntary carbon market. But I think it was quite 

2 striking that you couldn't get all the standards that

3 were in the market onto a graph on a single page with

4 anything but the names of them. The intention of the VCS

5 was, therefore, to go to the absolute minimum. 

6 There are many, many good credits, crediting

7 standards out there that talk about important things like

8 environmental benefits other than carbon, social

9 sustainability, that sort of thing. Those are all very,

10 very praiseworthy efforts. That was not our focus. We

11 wanted to make sure that every credit in the market was

12 real measurable and additionality. Ideally, all of those

13 other standards should also be VCS compatible and they

14 can be unit, they can be sold under both labels for

15 example. 

16 So, in the end, it's meant to form the

17 benchmark for the market, and recognizing that this is

18 going to be an international market, some of the

19 standards say just buy United Nations credits, well, that

20 means you can’t do a project in Oregon. Given that over

21 half of the voluntary market is in North America, that

22 just didn't make a lot of sense to us. 

23 Some basic assumptions that are made, the focus

24 is on projects that are done, are additional to the legal

25 compliance obligations that the entity doing the project
191

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 or controlling the source faces. So, that means, yes, it

2 will be difficult to do. You cannot do a renewal energy

3 project for VCS offsets in much of Europe. You can do

4 that in India. At present, you could do that in the

5 United States. At the point that there's a significant

6 regulatory barrier to that, it will become problematic. 

7 The focus was on driving innovation and new

8 activity. So, the project start date must be after

9 January 2002 and the earliest crediting period is March

10 28, 2006. I have to confess to you, I have no idea why

11 it's March 28th, but that is the earliest crediting

12 period. The intention is very simple there, it’s to

13 promote projects currently under development so that 

14 buyers have a fundamental assurance that the capital that

15 is flowing into the market is making some kind of

16 difference. 

17 In terms of the design of the standard, first

18 and foremost it looks to ISO 14064, the Part II standard

19 requirements. The VCS only provides additional

20 requirements where the ISO standard is either silent or

21 was seen through market experience that it did not

22 provide enough guidance to the project developers to

23 allow it to proceed. But it is meant to be an overlay at

24 best to the ISO 14064, and that is, in part, very clearly

25 because of the intention to have something that is
192

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 fundamentally compatible with regulatory programs in the

2 future. 

3 Every project can only use approved

4 methodologies either from existing GHG reduction programs

5 such as the United Nations Clean Development Mechanism. 

6 But I should point out that the very first non-regulatory

7 methodologies that will be accepted are almost certainly

8 going to be the California Climate Action Registry’s,

9 which that approval is currently under process. So, that

10 will be the first truly voluntary standards. 

11 Projects will have to use approved

12 additionality tools, such as IETA zone additionality tool

13 for the CDM or recognized methods of calculating and

14 demonstrating additionality, which I think we heard about

15 earlier today about technical substantiation. But the

16 basic intent there is to ensure the projects use clear

17 and transparent methods of calculating the baseline and

18 the achieved emissions reductions. 

19 Lastly, and this is, I think, critically

20 important to us, projects are required to use accredited

21 independent verifiers. At first glance, the critical

22 role of verifiers in this standard may pass unnoticed.

23 The verifiers are accountable for their work, and most

24 importantly, they're required to make good on and replace

25 any emissions reductions that are wrongly issued. So,
193

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 there is an actor in the process with a direct interest

2 in the fundamental accuracy of the crediting process. 

3 And our intention here was to assure that projects are

4 not over-issuing emission reductions and are not allowed

5 to double issue or double credit. 

6 Projects are registered in a central project

7 database. The host for that is still being identified. 

8 There's a current host, and I'm not sure but at present

9 that is out for competitive tender, in fact. All

10 projects under VCS will be registered within that

11 database, making available to the public the project

12 development document, the monitoring plan, the

13 verification reports, and all other documentation related

14 to the project, which we feel is essential to give the

15 public the transparency necessary to have confidence in

16 this standard. 

17 All of the VCUs, the voluntary carbon units,

18 are issued through an accredited registry which is

19 responsible for checking that any of the VCUs that are

20 presented to them or projects that are presented for VCU

21 issuance are legally owned and valid. So, there is a

22 point of responsibility there. And any trading of the

23 resulting VCUs is required to go through our accredited

24 custodial services in order to ensure at all times the

25 VCU can be traced to the rightful owner and, again, 
194

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 seeking to address the issue of fraud. 

2 With that, I'm happy to take any questions. 

3 There's an enormous amount of detail in this standard. 

4 It’s available both at V-C-S.org and IETA’s website,

5 along with the website of our partners in the Climate

6 Group and the World Business Council for Sustainable

7 Development. Thank you for your time. 

8 (Applause.)

9 MS. FRANKLE: Thank you, Ian. Now we're in the

10 question-and-answer session. This is a question for all

11 our panelists. As part of our green guides review, we're

12 considering whether the guide should be amended to

13 include guidance about carbon offsets and certification

14 of carbon offsets. I just wanted your thoughts on what

15 kind of guidance would be most useful for the green

16 guides to provide. 

17 Mario, do you want to start out? Oh, okay, go

18 ahead. Jennifer? 

19 MS. MARTIN: Sure. We're still working on our

20 written comments, but one of the things we think would be

21 useful is if a company wants to say we buy renewable

22 energy, that the FTC gives some guidance about how much

23 that is if they don't state a percentage. And in our

24 program, we think if a company says we buy renewable

25 energy, the inference is that they're matching 100
195

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 percent of their electricity use. We don't have a

2 mechanism to enforce that because we don't control all

3 the companies who are making those claims. So, that

4 would be something that would be useful from our

5 perspective. 

6 MS. FRANKLE: Thank you. Any other thoughts? 

7 MR. CARTER: At least on the carbon side, I

8 think one thing that might be a reach for what the FTC

9 can do at this point, but would be enormously important

10 would be to provide some kind of endorsement, not

11 necessarily in brand name but in principal, of what would

12 constitute a real standard. We'd like to think that the

13 VCS would qualify and that it would be something like

14 real, measurable, and verifiable. But something that

15 would serve the role of a positive list. In essence,

16 duplicating for an area where you have more direct

17 jurisdiction than we could possibly have, some of the

18 same intent. 

19 Our fundamental initiative was meant to be

20 international, but the FTC has, in its scope, some

21 ability to put some weight behind that. 

22 MS. FRANKLE: Okay. Mario?

23 MR. TEISL: The only thing I would add, it's a

24 while since I have looked at the guidelines, but my

25 impression was that they tend to -- FTC likes to be more
196

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 suggestive as opposed to regulatory, I think, in terms of

2 stipulating what exactly a firm should or should not be

3 doing. From a lot of firms’ perspectives, that may be

4 easier, you know, it provides them a little more

5 flexibility. 

6 But I think there's probably a lot of firms out

7 there, particularly smaller ones, that find that

8 uncertainty a little troubling because it leaves them

9 open to going down a road and maybe investing money into

10 new processes and all that and then finding out after the

11 fact that they're getting a letter from somebody saying,

12 no, well, you really shouldn't do it that way. A lot of

13 investment decisions already have a lot of uncertainty in

14 them anyway. If the guidelines were just a little more 

15 defined, I guess, I think that might be helpful. There’s

16 a trade-off.

17 MS. FRANKLE: This is an interesting question. 

18 Must offsets be either valid or invalid or could a scale

19 of validity be created such as AAA, ABB, things like

20 that, similar to credit markets. Any thoughts about

21 that? 

22 MS. MARTIN: I'll just jump in from the

23 perspective of our program. We think consumers believe

24 that when they spend money on a product that they're

25 getting 100 percent of what they have been told they're
197

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 getting and that from a consumer protection perspective

2 that there needs to be as close as you can get to a

3 guarantee that they're getting what they're paying for. 

4 This question sort of leads into the issue of

5 whether or not consumers are buying a commodity or if

6 they're making a donation, and there are at least one or

7 maybe more companies who are not selling an offset or a

8 REC as a commodity, which is what we’ve all been talking

9 about something that’s actually been created and then

10 documented and traded, but saying, you know, give your

11 money towards some project and we'll use your money to

12 help build a new project and then you'll get some future

13 share of what's created, and that's a very useful model

14 but it’s a very different thing that the consumer is

15 getting. 

16 I think that just needs to be clear in

17 everybody's head that there's a difference between what

18 is sort of like a donation program and what we've all

19 been talking about today which is really the purchase of

20 a property right. 

21 MR. TEISL: At first when I answered the

22 question, I was looking in terms of consumer research,

23 and certainly there are certification programs that are

24 not 01. I mean, you win the award or you don't. You

25 have a range. Like electricity labeling, right? I mean,
198

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 energy efficiency ratings where it's a scale. But that's

2 not really what your question was asking. 

3 It was almost like it sounded like is it okay

4 for it to be somewhat credible as opposed to really

5 credible. And my guess is that consumers would not

6 differentiate that. If they think it's somewhat credible

7 to them, it's not credible, that would be my guess. 

8 MS. FRANKLE: Okay, Ian. 

9 MR. CARTER: Yeah, I think you can have a

10 scale, but I don't think it can be a scale that ranks

11 validity. We heard the phrase “charismatic carbon”

12 earlier today, and I think there can be really, really

13 good projects and you can find interesting ways of

14 quantifying that, but at the end of the day you need to

15 know that a ton is a ton or you're not really doing

16 anything fundamentally meaningful. 

17 That has to be tempered by a somewhat pragmatic

18 realization that there's no way to get perfect empirical

19 certainty around the counterfactual. You just can't do

20 it. It's logically impossible. But I think as a bedrock

21 principle, you can't give up the idea that a ton really

22 is a ton. 

23 MS. FRANKLE: Okay. Before I ask the next

24 question, I've just been asked to make sure you all speak

25 directly into the mics because it's hard to hear. 
199

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 This is for you, Jennifer. How does Green-e

2 evaluate consumer interpretation of the marketing

3 materials that you review and the disclosures that you

4 propose?

5 MS. MARTIN: Well, our initial disclosures were

6 developed early in the program and we looked at what some

7 states were requiring for consumer labeling of

8 electricity products to guide the initial start of our

9 program, and then over time we've added to the

10 disclosures and changed them. Often, we get feedback

11 from customers directly saying what does this mean or

12 marketers, participants in our program will give us

13 feedback. So, we’ve changed it over time. 

14 We haven't been able to do a detailed sort of

15 focus group effort with consumers to see how they respond

16 to those things. We would love to do it, we just haven't

17 had the resources to do it until now. But it's just been

18 changed over time based on feedback we have gotten from

19 participants, both consumers and sellers. 

20 MS. FRANKLE: Another question, what do you see

21 as the consumer benefit to have this double certification

22 of project-based and retailer-based projects? For

23 example, if a person buys a gold standard offset, why

24 would that person need the additional CRS certification? 

25 MS. MARTIN: Well, if they bought a gold
200

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 standard offset and they were able to participate in a

2 registry directly, they would not need our certification

3 because they would act as sort of a largescale buyer

4 making their purchase on the wholesale market. The focus

5 of our program is really for those buyers who either

6 aren't informed well enough to be able to go out on the

7 wholesale market and make choices themselves or they're

8 not large enough to participate in that market and it

9 means they have to buy from one of the middlemen, these

10 marketers. And in that case, you do need the additional

11 step that we're providing, which is to make sure that the

12 marketers are actually delivering what's promised to

13 their customers. 

14 MS. FRANKLE: Okay. Question for Mario. 

15 Mario, what do you say about consumers’ reactions to eco

16 labeling and certification? 

17 MR. TEISL: Do I get another ten minutes to

18 talk about that? I’ve worked on a lot of eco, consumer

19 reactions to eco labels and eco marketing on lots of

20 different products, and the reactions are not standard

21 across products, partially because the reactions are

22 going to be contingent on their priors of the

23 environmental problem that you’re trying to fix and how

24 that's linked to the product and, also, the priors of how

25 environmental certification is linked to changes in other
201

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 attributes of the product. 

2 For example, in some recent work we did with

3 marketing of greener cars, people did not see the link

4 between or they do not see any differentiation across

5 vehicles in terms of their pollution characteristics. 

6 Seventy-five percent of people thought all cars and

7 trucks, SUVs, they all polluted the same amount. That's

8 clearly not true. So, that would affect the reactions to

9 any eco information you're trying to push in terms of

10 marketing. 

11 The other thing that we found is that although

12 some people responded favorably to eco information about

13 cars, they also indicated that they thought those cars

14 were probably more expensive, less safe to drive and had

15 lower performance characteristics. So, there's this

16 quandary of some of the producers and dealers not wanting

17 to push that information because all of a sudden they

18 bring in all these other intermeshed priors into the

19 buying process. 

20 Given that, that there's all this variation in

21 products and stuff, I think you can say that there's

22 consumers tend to like information disclosures that are

23 standardized across products. I mean, not the standards

24 are the same, but that the way you present the

25 information is standardized. The amount of detail you
202

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 provide for products is important, both in the short run

2 and the long run. Development of the industry and degree

3 in the industry. Who is giving you the information? If

4 there's any ancillary education or marketing activities. 

5 Those are mainly sort of the program characteristics. 

6 There's other characteristics of the person themselves

7 that get intermeshed with this stuff. But there's a lot

8 of variation within those variables. 

9 MS. FRANKLE: Well, I wish we had more time for

10 questions, but I do thank our panelists very much.

11 (Applause.)

12 MS. FRANKLE: We're going to take a 15-minute

13 break and we’ll resume at 3:30. Thanks.

14

15

16

17

18

19

20

21

22

23

24

25
203

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 SESSION 5: ROUNDTABLE DISCUSSION ON CONSUMER PROTECTION

2 CHALLENGES AND NEED FOR FTC GUIDANCE

3 MR. NEWSOME: Welcome back, everybody. This is

4 our last session. I want to thank everybody for coming

5 today. It's been very helpful for us to hear from the

6 various panels and I think this panel will be a good one,

7 too. We got some questions about logistics in terms of

8 public comments for the Green Guides review and for this

9 meeting. As most of you know, this meeting is part of

10 the overall review of the Green Guides that we're

11 conducting. We are accepting public comments

12 specifically on these topics, on carbon offsets and RECs. 

13 And the public comment period for that will be open after

14 this meeting for about two weeks. I think it closes on

15 January 25th. 

16 And concurrent with that, we've also announced

17 review of the Green Guides which address the broad range

18 of green claims and we're also accepting comments on

19 that. That's on a different docket. And the comments

20 for those close, I believe, February 11th, but it's a

21 little bit beyond the comments for this. 

22 So, what we're going to do here, we're going

23 have a roundtable discussion. We're going to try to hit

24 some of the issues that have been addressed earlier and

25 maybe some new issues. And what I would like to do is
204

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 before we start off with the discussion, I would like to

2 go down the table and if everyone could introduce

3 themselves and give a very brief introduction, that would

4 be great. We'll start with Wiley. 

5 MR. BARBOUR: Hi, I'm Wiley Barbour, I’m the

6 Director of Environmental Resources Trust. Recently, ERT

7 has joined with Windrock International, so I'll say I'm

8 with ERT Windrock, and I have been working in these

9 issues for the last 15 years. I’m very glad for FTC to

10 invite all of us here. And where have you been lately? 

11 MR. BROOKS: My name is Cameron Brooks. I work

12 as the Vice President of Resource Development for

13 Renewable Choice Energy. Renewable Choice Energy is a

14 full-service service provider of RECs and carbon offsets

15 to corporate and consumer clients. And I'm excited to

16 be here as well, mostly because I really see this as a --

17 the fact that this hearing is going on is a real mark of

18 the maturity of the industry that it warrants this kind

19 of scrutiny and attention, and I think it will only lead

20 to stronger products in the future. 

21 MS. RANGAN: Hi, my name is Urvashi Rangan. 

22 I'm a Senior Scientist and Policy Analyst at Consumers

23 Union. We publish Consumer Reports Magazine. I have

24 been rating environmental labels on food, personal care

25 products, cleaners, other things, and getting into these
205

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 labels as well on consumer products. I’ve been doing

2 that the last eight years. So, I'm particularly

3 interested in it from that point of view and hope to

4 bring some perspective on what we expect out of good

5 labeling and what ought to be on consumer products to

6 meet consumer expectations. 

7 MS. KOLLMUS: I'm Anja Kollmus. I work for the

8 Stockholm Environment Institute, the U.S. Center of the

9 Stockholm Institute. I'm a scientist there and I focus

10 mostly on carbon markets. I did a study last year

11 evaluating 13 offset retailers and I'm right now working

12 on a study that compares the standards that have come out

13 for the voluntary markets. So, if you are interested --

14 and this is a shameless plug. If you're interested in my

15 study, if you can just give me your card, it should come

16 out in two or three weeks. 

17 MR. CARLSON: My name is Eric Carlson. I’m the

18 Executive Director of carbonfund.org. We’re a non-profit

19 organization that’s probably one of the largest carbon

20 offset retailers and, to some extent, wholesalers in the

21 country. We work with 450 companies and actually over

22 100,000 individuals have participated in our programs to

23 date, in the process of offsetting over two billion

24 pounds of CO2 emissions. We're glad that the industry is

25 growing and that the certifications and the credibility
206

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 of the industry is growing, and we're welcome to

2 questions. Thank you. 

3 MR. CLOUSE: Good afternoon. My name is Matt

4 Clouse. I work at EPA. I’m here because EPA champions a

5 clean energy agenda in our interactions with state,

6 federal agencies and consumers to reduce and remove

7 barriers to improving the market for clean energy and we

8 utilize our brand name and our credibility to introduce

9 ideas such as green power and other clean energy options

10 and try to raise awareness of those. 

11 Through the Green Power Partnership, which I am

12 the Director of, we have been working with organizations

13 to increase usage of green power in the U.S. and we

14 launched in July of 2001. At this point, we have over

15 800 partners and those partners, on an annual basis,

16 purchase over 11 billion-kilowatt hours. 

17 MR. SCHASEL: Hi, I'm Rob Schasel with PepsiCo. 

18 I head the energy and environmental sustainability

19 efforts at PepsiCo. PepsiCo, for those that don't know,

20 includes Frito Lay, Quaker, Tropicana, Gatorade, as well

21 as the Pepsi family of carbonated beverages. We’re here

22 because in 2007 as a complement to our other

23 environmental sustainability strategies, which include

24 efficiency improvement in our operations, driving down

25 the amount of energy and water we consume, putting in our
207

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 own solar facilities and biomass facilities to minimize

2 the amount of energy that we’re consuming in our plants,

3 we also made a commitment to purchase renewable energy

4 certificates in an amount equal to 100 percent of the

5 electricity that we purchase and use in the United States

6 at all of our operations. 

7 Our Sun Chips brand is the first out of the box

8 in promoting that by putting the Green-e logo on the Sun

9 Chips bag and putting a statement on the back that says

10 we buy green energy credits to match 100 percent of the

11 electricity needed to produce Sun Chips, and we put the

12 Green-e website there as well as our own Sun Chips

13 website where consumers can learn more about what it is

14 we’re doing to help the environment. 

15 MR. STERN: I'm Adam Stern, Senior Advisor for

16 Business Development and Environmental Policy at

17 Terrapass. We're a San Francisco based company, one of

18 the largest retailers of carbon offsets. We help

19 individuals, primarily consumers, offset the impacts of

20 their driving, flying and home energy use. We support

21 three types of projects: wind power, methane digesters

22 that work at dairies and landfill gas flaring projects. 

23 We welcome the involvement of the FTC in this important

24 issue and are delighted to participate. 

25 MR. ZONANA: Thank you. My name is David
208

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Zonana. I’m from the California Department of Justice,

2 also known as the California Attorney General's Office. 

3 Along with my colleagues, we are working on climate

4 change issues in a number of areas. I come from the

5 consumer and energy area of our office. So, our

6 interests are very much aligned with the FTC and consumer

7 protection issues. We also bring with us the expertise

8 and knowledge learned from going through the energy

9 deregulation process in California. 

10 MR. NEWSOME: Thank you very much. What I

11 would like to do first, I would like to kind of go

12 straight to the heart of why we're holding this workshop

13 today, or one of the main reasons. This is part of the

14 overall Green Guides review. So, what we're trying to do

15 is trying to figure out whether we need additional

16 guidance for these products and the Green Guides, and if

17 so, what that guidance should be. So, what I would like

18 to do is I would like the panel to discuss what they see

19 FTC could address in this area and, included in that,

20 what are some of the biggest challenges to sellers of

21 these products in terms of making their claims, what are

22 the issues that they're dealing with, are their claims

23 out there that there are questions about, et cetera. 

24 But before we get into that, I want to just

25 give an example. I want to encourage everyone to look at
209

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the current Green Guides as you're considering these

2 issues and preparing comments. They cover a variety of

3 different green claims and they're set up in kind of an

4 example format. They give examples of claims that are

5 made and there's a commentary on whether those claims are

6 deceptive or not. 

7 Just some examples, there's a section on

8 general environmental benefit claims, and we talked about

9 that this morning a little bit. Example 3 in the guide

10 says a pump spray product is labeled environmentally

11 safe. Most of the product’s active ingredients consist

12 of volatile organic compounds that may cause smog by

13 contributing to ground level ozone formation. The claim

14 is deceptive because, absent further qualification, it is

15 likely to convey to consumers that the use of the product

16 will not result in air pollution or harm to the

17 environment. There are similar examples here for

18 recyclable claims and things like that. 

19 What I would like to ask is whether anyone can

20 offer some examples of claims that would be useful to go

21 into the guide for these markets, and as part of that,

22 some of the issues that the marketers are addressing and

23 that other people are seeing in the market that we should

24 cover. 

25 Now, we've also talked about how FTC does not
210

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 set comprehensive environmental regulations, we don't

2 identify preferred practices. Our focus is on making

3 sure that marketers are not using misleading claims and

4 protecting consumers. So, with that very broad question

5 and also an invitation for some broad discussion of that

6 and also an invitation for some very specific examples if

7 people think that these are the kinds of things that we

8 should address. 

9 Does anyone wants to take a crack at that. 

10 Urvashi? 

11 MS. RANGAN: Okay, thanks a lot, Hampton. I

12 think clarification of terminology out there is really

13 important. Things like carbon-free, carbon neutral,

14 carbon offset, carbon negative, which we have seen on

15 FIJI water, are really confusing to consumers and what

16 exactly that means. It seems to me, and I'm not an

17 expert in this area, but as someone who’s evaluating the

18 meaning of these labels and these general claims, that

19 direct offsets are potentially more meaningful than

20 indirect offsets. That's not to say indirect offsets are

21 not valuable. But there needs to be some kind of clarity

22 I think in these terms, so that if you're going to say

23 that you're carbon negative but you're using electricity

24 to generate production for your product and then you're

25 buying offsets upstream, downstream, that offset your
211

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 use, is that really carbon negative? 

2 I don't have survey data for you, but I would

3 think that a lot of consumers would not necessarily see

4 that as carbon negative, but rather a support of

5 alternative energy practices that offset what they have

6 used in fact. 

7 So, I think it would be wonderful if FTC could

8 add some clarity and some parameters to those terms so

9 that we couldn't bleed outside some of those lines and

10 that it would become clearer to consumers, okay, that's

11 direct offsetting so that company has done something to

12 offset their own energy uses. Oh, that's indirect. I'll

13 leave it at that. 

14 MR. NEWSOME: Okay, thank you. Rob. 

15 MR. SCHASEL: I think consistent with the

16 message that’s gone on most of the day, the statements

17 need to be capable of being certified and verifiable and

18 incremental, which is one of the reasons why we chose

19 renewable energy certificates that were certified by

20 Green-e because we could verify they were, in fact,

21 additional projects that were generating renewable energy

22 on our behalf. 

23 In addition, I think there's got to be some

24 standard -- I'm not sure exactly how you implement this,

25 but there's got to be some standard that the credits or
212

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the offsets that are being purchased are, in fact,

2 incremental to indigenous activities that are taking

3 place within the company's own operations. Again, you

4 shouldn’t just be able to buy your way to a carbon

5 neutral or carbon negative footprint, you should need to

6 be reducing your own consumption to the minimum point

7 possible, and then offsets are a viable strategy to take

8 that last step to get you to the point where you can

9 actually claim a neutrality. 

10 MR. NEWSOME: Okay, thank you. Matt. 

11 MR. CLOUSE: Following on Urvashi's comments, I

12 think the term “clarification” is important, but I also

13 think that clarifying scope is also important as well. 

14 And as we've seen with the inventory world, you can

15 choose, in some cases, to inventory your owned facilities

16 or your operational facilities which could include leased

17 space. 

18 But I think another boundary that's worth

19 considering, too, might be a brand boundary. There are

20 some corporations that have franchises, for instance,

21 that they may not own, but it might be confusing to the

22 public if a statement was made without proper disclosure.

23 Some might perceive the purchase to cover all of the

24 brand’s facilities when the corporate entity may not own

25 or operate all those facilities. 
213

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 MR. NEWSOME: Okay, let’s go to Adam. 

2 MR. STERN: I think as the discussion has shown

3 over the last six or seven hours, carbon offsetting is a

4 new and complex subject. It is difficult to explain to

5 people, and I have tried to do this maybe a thousand

6 times over the last year and a half, the basic notion

7 that you're driving your car or you're getting on an

8 airplane and then you're going to pay some money to a

9 provider who is going to support a project in another

10 place that's going to offset the impact of your activity. 

11 That's a communication challenge. 

12 I think the response here is that providers and

13 consumers ought to be looking for disclosures on the

14 websites, in the material that's provided to purchasers

15 of carbon offsets, and ways to document that the projects

16 themselves and the offsets have been verified. 

17 And just by way of example, and there's

18 certainly others in the industry who are following

19 similar guidelines, at Terrapass, every product that we

20 sell, whether it's for your car or your flight or home

21 energy use, we send the customer a product content label

22 consistent with what was described by Jennifer Martin of

23 the Green-e protocol. This is one step. There's

24 supplementary information on our website. We publish an

25 audit that reviews every single project, where they are,
214

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the number of tons that have been offset by that project. 

2 I think practices like these, some of my colleague here

3 are probably adopting them, too, if they can become more

4 widespread, go a long way towards strengthening the

5 confidence in this important market. 

6 MR. NEWSOME: Great, thanks. Cameron. 

7 MR. BROOKS: Well, to answer the question and

8 to echo, I think, some of the comments that have been

9 offered already, I would see one area that the FTC can

10 really build on an opportunity, as far as offering

11 guidance, is in the area of making more precise claims. 

12 So, at Renewable Choice, we certainly see that every

13 transaction we enter into is an opportunity to help

14 educate the customer and to help educate them not just

15 simply to transact, but so they understand how and why

16 and they can communicate effectively that their

17 commitment is making some kind of difference and

18 precisely what that difference is. 

19 So, I think the comment about scope is very

20 well-taken and that can build on trends that we have seen

21 in the standards that are coming out over the last 18

22 months and in the work that folks have done at WRI or EPA

23 or voluntary carbon standard or ERT or what have you in

24 terms of defining what are the different scopes, how do

25 you draw boundaries, what are the applicable vehicles or
215

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 instruments that can be used to apply against those

2 different scopes, and then working certainly with our

3 corporate customers to help guide their claims that

4 they're making and with the individual consumer. 

5 Like at Terrapass, we're constantly updating

6 the materials that go out and I really like what I heard

7 about on the Sun Chips bag there because it says

8 specifically what is being purchased and what's being

9 offset. It doesn't simply say powered by wind or

10 something along those lines. So, more precision would be

11 very welcome and I think the FTC can help lead the way

12 there. 

13 MR. NEWSOME: Thank you. Wiley. 

14 MR. BARBOUR: Thanks. I just want to say I

15 think we're at a historic point in time. The U.S. is on

16 the brink, after 15 years of trying to address climate

17 change as a voluntary issue, we're really on the brink of

18 addressing this in a mandatory way. That has to be a key

19 consideration for everyone in this room because it

20 changes the way you think about these tradeable

21 environmental commodities. We're joining a global market

22 for environmental commodities. Those markets succeed

23 when they’re based on the ability to measure, report and

24 verify these environmental goods such as renewable energy

25 generation or emission reductions, to be able to track
216

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 those over time, to have a set of rules that governs how

2 they're created and allocated and traded and ultimately

3 used and retired. 

4 The good news is we have a lot of this

5 infrastructure in the United States, so we're not

6 completely unable to respond to this change that's coming

7 very rapidly. But we're still dealing with the legacy of

8 almost two decades of thinking of this as a voluntary

9 issue, as something that can be solved through voluntary

10 actions. I think there's a great deal of good that can

11 be harnessed by the voluntary market and the drive by

12 companies and others to go out and buy these whether or

13 not there's regulatory initiative. 

14 But at the same time what we see from all the

15 participants in the last couple of panels is although

16 everyone’s being very polite, there are real differences

17 about what counts and maybe we should be a little bit

18 more straight up and point those differences out. The

19 real differences amongst professionals in this field

20 about whether or not a REC really does transfer to the

21 buyer in emission reduction. There are real differences

22 of opinion about whether or not a forestry project, which

23 is going to take 50 years to grow if the carbon should be

24 counted as a reduction today. 

25 So, these are things we ought to heighten and
217

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 sharpen and these are policy calls. So, we have an

2 underlying basis for measurement and verification, and

3 probably most of the people in this room could come to an

4 agreement over what is an emission because we understand

5 the fundamental processes that create emissions. But, as

6 I think Jim Sullivan pointed out in an earlier panel,

7 where you hit the rub is where you decide what is a

8 reduction, and that requires a policy call about a

9 baseline and that's where you’re not going to get, we

10 haven't so far, agreement in the community. This is

11 where I think FTC could be really valuable especially in

12 this transition period in the next couple of years where

13 we don't have a mandatory system and, yet, there's an

14 enormous activity. 

15 I'll just say in looking at your environmental

16 marketing guides under qualifications and disclosures,

17 there's a statement that says that in order to be

18 effective, a qualification or disclosure such as those

19 described in these guides should be sufficiently clear,

20 prominent and understandable to prevent deception. 

21 In my experience, if you're thinking of a

22 qualifier that can explain to a general member of the

23 public what exactly we mean when we say there's an

24 indirect reduction being transferred, I'm not convinced

25 that we really are able to do that in a sufficiently
218

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 clear, prominent and understandable way. I think this is

2 an issue that -- there's no real consensus amongst the

3 folks that you have assembled here in these panels. The

4 public needs something simple. And really this is about

5 price. I think that any environmental commodity that is

6 being put forward as something that conveys a reduction,

7 we could find an emission reduction that would be

8 unimpeachable such as a Kyoto protocol allowance or

9 credit, but they cost too much. So, we're looking for a

10 cheap alternative. That's really what this is about, so

11 we need to really sharpen the discussion I think. 

12 MR. NEWSOME: Great, thanks. A couple of

13 issues you raised, hopefully, we can get back to. Let’s

14 go to David at the end. 

15 MR. ZONANA: Thank you. Something the last

16 speaker said triggered a thought in my head. The 

17 general comment is this: The FTC guidelines are

18 non-binding, they’re not regulations. They're there to

19 help provide industry with some guidance and help educate

20 consumers. The law is already on the books. The FTC Act

21 is there, the various state laws are there, and those

22 laws require that those marketing the product don't

23 deceive the consumer, that they make clear statements of

24 what they're selling, and that, in general, along with

25 the principles that the guides set out that they be able
219

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 to substantiate their claims. 

2 So, the farther you go in making a claim, the

3 more you have to think about how you're going to

4 substantiate that claim. The more careful you are with

5 your marketing claim, the easier it may be to

6 substantiate it. 

7 So, even without guidance, there are laws out

8 there, there are standards. And I think it would still

9 be very beneficial to have the FTC weigh in on these

10 issues, where it can, where it finds that there is

11 sufficient consensus or clarity or a need to, by example,

12 define out some bad practices. 

13 MR. NEWSOME: Thank you. Just to clarify,

14 David's right in that the guides are not technically

15 regulations, they're not rules. But they are

16 interpretations of -- they basically show how FTC would

17 interpret the FTC Act. So, if a company is doing

18 something that’s inconsistent with the guides and the FTC

19 were taking enforcement action, we would cite to the FTC

20 Act instead of the Green Guides. But, nevertheless, the

21 Green Guides represent interpretations of the FTC Act. 

22 So, let's go to Rob. 

23 MR. SCHASEL: Thanks. I just wanted to pick up

24 on one of the things that Wiley said and reinforce and

25 maybe amplify it a little bit because I think he pointed
220

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 out a stumbling block that we're probably going to

2 continue to stumble over for the next couple of years,

3 which is there are some things that voluntary markets can

4 do well and voluntary markets can prove incremental

5 positives very well because there's something there to go

6 and put your fingers on and touch and feel. 

7 Voluntary markets cannot prove negatives very

8 well. So, in the absence of some type of mandatory cap

9 and trade legislation, I think carbon offsets are going

10 to be something that we continue to struggle with because

11 it's very difficult to prove a negative. In the absence

12 of a mandatory cap and trade type legislation, carbon

13 offsets are the equivalent not just of the old analogy of

14 squeezing a balloon where you squeeze it over here and it

15 reappears over here, but really it’s squeezing a balloon

16 while you continue to blow it up because we continue to

17 add additional carbon emissions year over year over year

18 in the United States. So, you claim a carbon offset, but

19 meanwhile the total emissions continue to grow

20 So, in the absence of having a verifiable cap

21 that we're not going to exceed, carbon offsets are going

22 to continue to be a very difficult thing that I think

23 consumers will struggle with because, in a sense, it is a

24 vapor product until we have got a cap that doesn't get

25 exceeded and an offset really does mean a ton of carbon
221

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 that doesn't get emitted. So, before that happens, we

2 look at voluntary markets as being much better in terms

3 of proving a positive, like a renewable energy kilowatt

4 hour generated which you can actually go and verify did

5 happen. 

6 MR. NEWSOME: Okay, thank you. Matt. 

7 MR. CLOUSE: Going from the general to the

8 specific, I’m providing some examples. One of the issues

9 we have seen is with more companies interested in putting

10 on-site renewable systems at their facility, there is

11 some confusion when the RECs are sold about what claims

12 can be made. And I would suggest that FTC could play an

13 important role on clarifying those claims, once the RECs

14 have been sold and what claims you have when RECs are

15 held. 

16 MR. NEWSOME: Okay, thanks. Eric. 

17 MR. CARLSON: I’d just like to chime in that,

18 from the discussions earlier, I think we need to put out

19 a little bit about some of the consensus that has emerged

20 and actually been around, I think, almost since the

21 inception of the market. That is that certification is

22 really the hallmark of quality in the REC and the offset

23 industries. It answers the fundamental question, is this

24 real and who says so? 

25 And what you saw, I think, from the previous
222

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 presentations was all the different criteria that go into

2 these certifications are a little bit different, but very

3 much the same, baseline, measurable, real, verifiable,

4 you name it, it goes on and on. I think reasonable

5 people, as Wiley pointed out, can disagree a little bit

6 here and there on some of the technical details. I

7 suspect the FTC wouldn't engage in that. But that's a

8 good line for the industry to continue to become involved

9 in or to debate. 

10 Certification really answers that for the

11 consumer. If it’s Green-e, this is what it means. It’s

12 very transparent. They’ve got hundreds of stakeholders. 

13 If it's Environmental Resources Trust, the same thing. 

14 Voluntary carbon standard, and so on and so forth. We

15 don't have a lack of standards in the industry. We have

16 a huge number of standards, and I think the background of

17 these more or less are the same, although let's say

18 Green-e only does renewable energy in the U.S. So, if

19 you want renewable energy in India, you’ve got to go

20 somewhere else, and so on and so forth. 

21 So, I actually see a lot of positive things in

22 the industry, a lot of things we can agree on. But I

23 think we do need to say is it certified, because that

24 really gets you to a whole other level of quality, or is

25 it not? We need the dialogue, we need people to say, to
223

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 really reject or dismiss offsets that aren't or at least

2 require a certain amount of justification behind those. 

3 MR. NEWSOME: Okay, thanks. If we could just

4 do a short diversion. Andy, I'll get to you in a second. 

5 I would like to go into what people's thoughts are on tip

6 for consumers, the kinds of things that FTC could

7 provide, information to consumers about what to look for

8 when they're purchasing these products. 

9 Before we do that, Wiley mentioned the issue of

10 RECs as offsets. It's been discussed today. I know that

11 there are different opinions on the panel and there has

12 been a lot of discussion. I was wondering if I could ask

13 a few of you just to give a very brief overview of your

14 position on that, and I'll pick on Wiley first since we

15 talked about it on the phone and I know that you have

16 some opinions on it. And if Adam or Eric, if you want to

17 briefly discuss where you all stand on that issue. Then

18 I would like to move on with Anja's comment and then go

19 to consumer tips. 

20 So, I don't want to spend an extra hour on RECs

21 as offsets, but I would like to get this on the table at

22 least. So, Wiley, we’ll go with you.

23 MR. BARBOUR: For complete comments, ERT

24 provided joint comments on this issue to CRS when they

25 asked for comments on their GHG renewable energy
224

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 protocol. So, there are comments from ERT and the

2 Greenhouse Gas Expert Network and Pew Center on Climate

3 and the California Climate Action Registry that are

4 jointly our views on this. I think the short answer is

5 no, a REC is not an offset. 

6 When I think about this, think about it from

7 the perspective of consumer protection, I think about the

8 story about the country bumpkin who takes a bus to New

9 York City and he gets off onto the sidewalk, and pretty

10 soon, he meets a gentleman who makes him a great deal, he

11 sells him the Brooklyn Bridge. Everything is great until

12 someone points out that, actually, you didn't really buy

13 the Brooklyn Bridge because the seller didn't own it. 

14 So, it's a fundamental issue for me when you

15 think about these environmental markets and when you're

16 buying something is, you know, is ownership clear? Is it

17 contested? Are there more than one claimant to that

18 product or that benefit? If so, that's a problem. ERT

19 operates a Greenhouse Gas Registry, and as a registry

20 operator, the first question we have to ascertain is does

21 this person who is seeking to register a project or

22 offset with us really own it? 

23 And, really, this is a fundamental issue with

24 RECs. And the whole idea that you own an indirect

25 reduction, I think, is a little bit deceptive because it
225

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 sounds like you really own something, but what you're

2 saying is you own a reduction on someone else's property. 

3 Maybe you can get it, maybe you can't. But to say that

4 you can sell that, I think, is fundamentally quite

5 questionable. And this has been ERT's position for over

6 a decade and we are a certifier of RECs and we certainly

7 support renewable energy, but you have to be careful

8 about what it is that you're conveying. 

9 I think that we've adopted the language from

10 the GHG protocol to say you're transferring this indirect

11 production, but it is tricky and I think the EPA position

12 that the Climate Leaders distributed, I think is getting

13 us in the right direction. But it's clearly saying it's

14 not the same as a verified emission reduction where

15 you've got a whole set of activities that go into the

16 creation of that environmental product and real third

17 party attestation and clear delineation, and there's

18 usually a big report on that. You just don't go through

19 that process with a REC. 

20 MR. NEWSOME: Well, there are certainly

21 different opinions on that as we've seen today. Why

22 don't we go to Anja. 

23 MS. KOLLMUS: Thank you. A couple of things, I

24 wanted to comment on Eric's comment on certification.

25 Certification can only be as good as the standard is that
226

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 it certifies by, and that's actually something where I

2 feel there can also be some consumer confusion and

3 possibly deception. Because if you certify a weak

4 standard that doesn't have a very stringent definition of

5 additionality, you can put a very big label saying this

6 was certified, but it's really kind of a meaningless

7 certification. 

8 I have talked to certifiers and they’re very

9 really aware of that. They say we only go in there to see

10 if the emissions reductions have actually occurred. We

11 don't question the additionality assumptions. So,

12 there's a little bit of a qualifier, yes, certification

13 is very important, but the underlying standard is even

14 more important. 

15 And to tie that in with your question about

16 RECs, I think RECs are a very different commodity from

17 offsets. They have been designed for a very different

18 market and there are two issues why, in my opinion, they

19 cannot be easily used as carbon offsets. One is

20 ownership issues and the other one is additionality. And

21 we've heard some people say today that the additionality,

22 people are getting tired of the additionality discussion. 

23 I actually disagree with that. It's a very complex issue

24 and it needs to be discussed, and we need to have a

25 continuous conversation about it. 
227

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 There is no silver bullet, there might be a

2 silver bucket though. So, in terms of RECs, for me --

3 Jim from EPA said, if market penetration is so small, you

4 know, if it’s less than 2 percent, why bother with this

5 whole additionality question? But if it turns out even

6 the market penetration is so small, if the renewable 

7 facilities I’m building, I’m able to build it because I’m

8 getting a huge tax credit, so for renewable energy, just

9 to give an example, you probably earn around $90 per

10 megawatt and about 50 or so or 40 or so of that comes

11 from a tax credit. If only an additional $2 for a

12 megawatt comes from a REC, how could I possibly claim

13 that those $2 are the ones that enable me to build that

14 facility? 

15 MR. NEWSOME: Okay. Adam. 

16 MR. STERN: This is a debate that’s been going

17 on four or five years. And I don't want to necessarily

18 represent the renewable energy industry, but I'm sure

19 there are people in this room who would be happy to

20 present in written comments the support there is in the

21 world for applying RECs as an offset. They're a very

22 reputable organizations including some who appeared on

23 the panel earlier, like the World Resources Institute,

24 The Union of Concerned Scientists, Natural Resources

25 Defense Council, that have all indicated a support for
228

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 using RECs as an offset value. 

2 I can tell you from Terrapass's experience that

3 we buy Green-e RECs. Those are ones that are not in

4 states that have renewable portfolio standards, so

5 they're not just meeting a regulatory cap at some level. 

6 We don’t buy in RGGI states either where there is an

7 emerging cap taking shape there. We register our

8 transactions so there's a record of them, and we retire

9 the credits so that they can't be traded again. I think

10 these kinds of procedures that our business follows, and

11 some of my colleagues here on the panel do as well, are

12 the kinds of things that can reassure customers that they

13 know what they're getting and this it's a legitimate way

14 to offset a portion of your activities whether they be

15 driving, flying or using electricity. 

16 MR. NEWSOME: Thank you. Eric. 

17 MR. CARLSON: I’m happy to weigh in here. 

18 First, let me say that I think that we need to keep in

19 mind here exactly what it is we're trying to do, and I

20 hate to sound a bit pithy, but the goal here is to

21 actually reduce carbon dioxide emissions. If there is

22 anybody here whose goal that is not, you're probably at

23 the wrong forum. 

24 To that end, the planet doesn't care how you

25 reduce your emissions, whether it's through Central
229

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Europe imploding in the 1990s through renewable energy,

2 energy efficiency or some other form. It doesn't care

3 where, whether in Boston, Brazil or Bombay, and it really

4 doesn't care why. The fight here is against climate

5 change in reducing carbon dioxide emissions as quickly as

6 possible. 

7 I think that the certification bodies that are

8 out there have taken into account additionality in as

9 objective a way as you can without trying to tie up the

10 industry in knots and trying to figure out what is

11 exactly is, say, financial additionality. It is a 1

12 percent return on investment, 5 percent, 10 percent, 3

13 percent above coal, 15, 20, or something like that?

14 But I would go back to saying that I think we

15 can all agree that at least with a certification, and I'm

16 going to disagree with Anja here, you know what those

17 criteria are and you know that there's a body of support

18 behind that. Rather than saying taking the words from,

19 say, a marketer that self-verifies, self-certifies and

20 whatever and maybe just puts a lot of language up on

21 their website, that's not the same as saying that Green-e

22 says this and all of these bodies back Green-e. I think

23 we need to take that into account. 

24 My own feeling is that RECs are offsets. 

25 Again, going back to the planetary guidance here. If a
230

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 wind REC does not reduce emissions or offset emissions,

2 my question then is what does it do? If I use

3 10,000-kilowatt hours of electricity, and I can either go

4 to my utility or I can go to the market and get say wind

5 energy or something like that, I'm buying a very real,

6 certifiable commodity and the environmental claims to say

7 such. According to who? Well, according to the EPA and

8 according to the EGRID.

9 The basic formula for how a REC becomes an

10 offset is simple. One REC equals one megawatt hour of

11 environmental attributes and one megawatt hour is

12 determined using EGRID. Now, there are absolutely

13 technical details of where these things take place, the

14 regulatory issues coming into effect and all that. But

15 at its core, if buying a wind REC or some other REC

16 that's certified and is not double counted and all that

17 doesn't reduce pollution, then it's not really clean. 

18 We're saying buy clean power, but if it's not clean than

19 what is it? It's absolutely offsetting what is being

20 used in the grid. 

21 MR. NEWSOME: Okay, thanks. Cameron next, I

22 see a lot of cards up and I don't want to do an hour on

23 RECs. So, if we have comments on RECs, let's try to keep

24 them as brief as possible, but I want to make sure

25 everybody gets a chance to speak. So, Cameron. 
231

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 MR. BROOKS: Just a couple of quick thoughts. 

2 I couldn't agree more with you that the standard is

3 critical. And conversations about quality, I think, take

4 place at the level of the standard and that's key. 

5 On the question of RECs as offsets, I do think

6 that that comes down or comes back to a question of scope

7 and whether you're talking about Scope 1, 2 or 3

8 emissions and there are differences there. As Wiley

9 pointed out, there are real questions about property

10 rights which, right now, I think the property rights are

11 captured either through a contract path that retailers

12 have to sellers or through some kind of regulation, but

13 that is clearly an area that the FTC could help the

14 industry quite a bit as far as offering guidance. 

15 Ultimately, I suppose a lot of that stuff will be tested

16 in case law that I'm not going to comment on. 

17 I also won't comment on the question of whether

18 or not consumers are growing tired of talking about

19 additionality. I think what is very clear is that

20 customers are not growing tired about talking about

21 change. So, these are the same customers that are, in

22 many states, voting to enact new policies that, as Wiley

23 wants to see and I think all of us here want to see,

24 tough, aggressive mandatory policies that require change

25 as far as auto emissions, energy use, a whole panoply of
232

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 things that relate to carbon emissions. 

2 One anecdote that I would offer that would

3 point out perhaps some of the complexity of how you judge

4 a $2 or $5 or a $10 REC within a financing picture that

5 looks at a 90-megawatt hour project development --

6 recently, one of the leaders in the industry spoke at the

7 Green Power Marketing Conference, so he's helped to

8 develop one of the major project development companies

9 and a leader in the green energy space. He made the

10 observation that not one project moving forward today is

11 doing so without incorporating the value of RECs into the

12 core financing of their project. That is a sea change

13 from a couple of years ago. 

14 Lori Bird and others at NREL have published a

15 report that shows that going forward there is expected to

16 be a significant shortage between supply and demand,

17 which clearly demonstrates that the aggregated demand

18 that consumers and corporate buyers have and are -- you

19 know, we like to think that we and others that are

20 forming industry associations around renewable marketing

21 are playing a role in aggregating that demand and driving

22 it and shaping it in ways that it can be integrated into

23 that financing. But it’s clearly playing a role that is

24 adding a new financing stream to project development, and

25 I think that that's core change and I think it’s
233

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 important to recognize, and I think that that's an area

2 that is to be applauded and to be promoted at all

3 opportunities. 

4 MR. NEWSOME: Let’s go to Urvashi. Thanks,

5 Cameron. 

6 MS. RANGAN: As someone who has looked at over

7 150 labels on products, I can tell you that we look at

8 how meaningful those standards are as the first criteria. 

9 So, I just want to echo what Anja had to say about that. 

10 We have seen plenty of certification programs, 

11 whether it's the whole standard or part of the standard,

12 that has very weak criteria in terms of what they're

13 doing to enforce the standard. One example we have is a

14 certifier who says they have chemical management going on

15 and forest management. The way they actually put that

16 into practical use is leave that up to the forester to

17 decide how they’re going to manage their chemical use. 

18 That’s not a standard, that’s not meeting chemical

19 management.

20 So, sometimes you have to look beyond the

21 rhetoric of what's actually being said and you have to

22 look at how the standard is indeed being verified to

23 really get underneath whether a standard is particularly 

24 meaningful. 

25 That said, the next criteria we look at is
234

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 verification, and that is an important step. But I don't

2 think we're here today to mandate certification programs,

3 at least that wasn't my understanding. And there may

4 very well be certification programs that exist and those

5 will be rated and judged by consumers as to how

6 meaningful they are, and then there will be voluntary

7 claims and what can we do in the marketplace to prevent

8 deception with regard to those voluntary claims. And I

9 think that’s sort of where we are in the discussion. 

10 I also want to echo a few other things and I’m

11 going to incorporate tips for consumers. Additionality,

12 it’s a really wonky term we’re using here, but for 

13 consumers it means what is the value over the baseline,

14 what is the value over a conventional? That's how

15 consumers make judgments about whether they're willing to

16 spend extra money for something. So, if you're doing

17 something that's 10 percent over baseline versus 80

18 percent over baseline, that's a meaningful difference to

19 a consumer. It may mean a difference in one consumer

20 supporting that product, buying that product, buying that

21 service, and one not. 

22 And I don't think this is a one size fits all

23 kind of issue or value. I think consumers are going to

24 make their value judgments based on their own

25 interpretations of whether you're meeting their
235

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 expectations or not among that realm. But what we

2 clearly need is full disclosure and transparency in order

3 for consumers to be able to adequately make those

4 judgment calls. 

5 So, for example, if you're doing offsetting,

6 quantifying that offsetting in some way for consumers, I

7 think would be an incredibly important element to add to

8 your labeling schemes so that consumers could make a

9 judgment among products as to whether or not there is a

10 difference in the value that you're adding. 

11 MR. NEWSOME: Great, thank you, Urvashi. 

12 That's a good segue. So, let's talk about consumers and,

13 Anja, you're next. So, let me just frame the question

14 and then we'll go into it. I want you to answer it, too,

15 because you have done that report that you did last year

16 focusing on the consumer end. 

17 The question is a basic one. Your neighbor

18 comes up to you over the fence and says, I want to buy

19 these offsets online or I want to buy RECs, and they

20 really want to dig into it and they want to learn about

21 it. What are the four or five things you tell them to

22 look out for and to ask and the kinds of information that

23 they should seek when they're looking at these products? 

24 So, Anja, let's start with you. 

25 MS. KOLLMUS: Well, the first thing I would
236

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 tell them is that first they should reduce their own

2 emissions. It's important to keep in mind that we have

3 to reduce emissions by 80 percent if we want to minimize

4 the possibility of having a larger than two-degree

5 centigrade warming. That doesn't mean we're not going to

6 see some major changes already. 

7 So, the stakes are very high and the reductions

8 we are required to make are very, very large, and offsets

9 have to be put in perspective with that ultimate goal we

10 have. That's true for national and international policy,

11 as well as personal action. So, that's the first thing I

12 would say, you have to reduce your own carbon footprint

13 first. 

14 And then I would say additionality is certainly

15 an important thing to question, are the offsets you are

16 purchasing really additional. And, of course, no one

17 argues with Eric that windmills are producing fewer

18 emissions than a coal plant. The key question is, are

19 you the one who is causing the change? So, if your

20 contribution is not causing any change, you cannot really

21 claim that you're helping to reduce those emissions. 

22 The little example I often use is if say

23 Urvashi comes to me and says, I would like to buy a

24 Prius, but I really can't afford it. And I’ll say to

25 her, you know, I'll give you $3,000 so you can buy it,
237

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 but I want to claim the carbon benefits you get from

2 having a more efficient car. That I would consider an

3 additional project because she wouldn't be able to buy

4 her Prius if I didn't help her. If she came to me and

5 said, I bought just a Prius, and I said to her, can I

6 give you $3,000 so that I can claim credit for the carbon

7 offsets, it's exactly the same. But in a second example,

8 it's not additional because she already bought the Prius. 

9 So, I think the FTC could -- it would be

10 helpful for consumers to have a little bit of a

11 guideline, a little bit of an explanation, why is this

12 such a complex issue and what really is it about? So,

13 additionallity would be one. 

14 The second one would be what kind of project do

15 you want? Do you want to have a project that has

16 additional benefits, that has additional social or

17 environmental benefits? Do you want a project that is

18 implemented in the U.S. or do you want a project that is

19 implemented in the developing countries? And then what

20 type of project. And I think there is, in each category,

21 renewable energy, energy efficiency, forestry, there's

22 valid and good projects and it's kind of up to the

23 consumer to choose what he feels most comfortable in

24 supporting. 

25 MR. NEWSOME: Thank you. We’ll go to Wiley
238

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 next, but added to that, I’m just curious whether we're

2 seeing or we expect to see competition or advertising

3 based on different types of offset activities and whether

4 there's an indication that consumers prefer offsets from

5 one type of activity because maybe it's less complicated

6 or they're more comfortable with it. Just an extra

7 question there. I would like us to continue to talk

8 about the over the backyard fence discussion with your

9 neighbor. Wiley. 

10 MR. BARBOUR: I'll take your question on

11 because I think it’s tied in. In any conference, you’ll

12 hear a variety of people say, additionality is the most

13 important characteristic of a project. I don't

14 particularly believe that myself, but you'll hear that

15 over and over again. So, your question is when people

16 come -- and I often get calls from people saying I'm

17 looking for an offset project, you know, how many times

18 is it I'm looking for the most additional project. And

19 the answer is not very often. Additionality is a great

20 idea in theory, it's really hard to implement in

21 practice. It's an idea that says we can pick the winners

22 in this marketplace, we can figure out objectively what's

23 the best place to direct capital to where it will achieve

24 the greatest environmental good. And it's a great idea,

25 but it just is really hard to put into place. 
239

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 When I get calls for offsets, it's often I need

2 offsets in the Southwest, I need offsets from the

3 transportation sector, I need a land-based offset in

4 China, I need offsets from a Muslim country. So, when

5 you ask what does the public want, the answer is a whole

6 huge variety of different types of characteristics. And

7 when I think about what we can reasonably expect members

8 of the public to understand in terms of these

9 disclosures, I'm not at all convinced, after having heard

10 all these comments, that we can really expect the public

11 to dissect and understand all these arguments and,

12 therefore, it's okay to have multiple different types of

13 standards that would quantify things very differently. 

14 I think there is a real problem with standards

15 and with these concepts and, ultimately, we will need

16 some clear policy guidance, and I think it's a real

17 challenge to try to think about where those signals could

18 come from the quickest and with the most authority. 

19 And, again, we should keep our eye on the

20 prize. We are going through an enormous change in this

21 country, so what we ought to be thinking about is what

22 voluntary market do we want to see when we have a

23 mandatory cap on greenhouse gases in place. And in

24 thinking about that, we ought to think about how should

25 we be designing this market right now so that that
240

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 transition is smooth? And if we build up a set of

2 expectations from the public on what might be contained

3 in a product and then once the cap comes in, it's no

4 longer contained in that product, what have we just done? 

5 I don't think we've done the right type of service. 

6 So, I think we ought to be really -- and this

7 is part of the transition that needs to happen -- we need

8 to really rethink all these issues in terms of where we

9 are right now and we are on the brink of a completely

10 different approach to our emissions. And as Anja pointed

11 out, we need to reduce not just 5 or 10 percent, but

12 ultimately 80 percent. 

13 So, the whole idea of additionality, again,

14 it's challenged once you’re in a compliance regime, once

15 you're dealing with a defined environmental product with

16 clear ownership of that right to pollute and someone

17 wants to buy that, like buying an SO2 allowance and

18 retiring that, to me, that is a very efficient and

19 reasonable way to reduce pollution that's available to

20 all members of the public. 

21 My organization owns 16,000 SO2 allowances and

22 we’ll sell them to any one of you who wants to retire

23 that allowance, but the point is it costs real money,

24 more than most of these products are priced at, and it's

25 really not something that passes an additionality test. 
241

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 It is simply the ability by the development of an

2 environmental market to transfer title to the right to

3 pollute and you, as an individual, has the right to then

4 throw it in the garbage so it will never happen. I think

5 that's a highly credible environmental product, but I

6 don’t know if it fits the definition of additional or

7 not. 

8 MR. NEWSOME: Thanks. Matt, let’s go to you. 

9 MR. CLOUSE: I have a number of follow-up

10 comments and Wiley prompted one. I would like us to not

11 think that the potential future carbon market will

12 eclipse voluntary markets as we see them now. I don't

13 think we need to have these voluntary markets be entirely

14 paving the path to the future. I think that in the

15 future, if we do have regulation, there will be sectors

16 that aren't capped, there will be sectors that aren’t

17 fully covered. I think there will be businesses that

18 want to go beyond what they have to do. We have to think

19 of them as separate markets and that do separate

20 activities. They both, especially the voluntary market,

21 need to be credible, otherwise it doesn't move forward. 

22 If I could go back to the hybrid purchase

23 example on additionality. I'm growing frustrated with

24 the financial additionality test. I think it's very

25 simple to understand by many people, and that's part of
242

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 the problem. Because when you start looking at the

2 details of how you prove additionality through financial

3 means, it's quite complex. If you look at a wind farm,

4 how is that wind farm financed, is it financed through

5 debt, is it financed through equity? There's a number of

6 ways that gets quite complicated to get at financial

7 additionality. The idea of RECs are that you're paying a

8 small portion, but it's a small portion that make as

9 significant difference. How much of a difference? How

10 do you prove that made a difference? 

11 I think moving towards a performance-based

12 standard makes a lot more sense and that you're looking

13 at what happens overall in that sector and setting a

14 standard for what is really above and beyond what's

15 happening in that marketplace at a business level. 

16 And then the last thing on ownership, I think

17 EPA has tried to take a prudent position at this time in

18 the absence of a policy call over who can make ownership

19 claims, and that current prudent path is to have separate

20 accounting as you see in Climate Leaders, as you see in

21 the WRI guidance for indirect and direct. It gives

22 credit to those who can control their purchases, like

23 Pepsi when they can go out and choose not to buy

24 conventional power but buy RECs, and they can account for

25 that and encourage them to take action now. 
243

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 There's also incentives for those who are

2 generators to register their own direct emissions there,

3 too. 

4 So, some folks in the room are taking kind of

5 an advocate position towards ownership that seems

6 somewhat reasonable, given that we haven't seen claims

7 from fossil generators saying you stole my claim. We

8 haven't seen those. This market has been in existence

9 ten years, there hasn't been that battle to date. But as

10 EPA, as we are advising the companies we work with, like

11 Pepsi sitting next to us, like many other very large

12 companies, we advocate a very prudent approach until that

13 policy call is made. And those are my comments. 

14 MR. NEWSOME: Thanks, Matt. All right, Rob. 

15 MR. SCHASEL: Yeah, I want to get back to the

16 question of what would I say to the neighbor when asked

17 about buying products with environmental claims. I’ll

18 walk out on a limb here and say that I think the average

19 residential consumer is far more likely to be struggling

20 with the question of which consumer product do I buy

21 based upon the environmental claim associated with it

22 than they are ever to be faced with the which REC or

23 which carbon offset do I buy. So, I'm going to direct my

24 kind of answers towards which consumer products based

25 upon environmental claims. 
244

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 And if my neighbor asked me that question over

2 the fence, after I got through the obligatory obvious

3 answer, which is obviously PepsiCo products, I think I

4 would try to give the answer that Anja gave which is make

5 sure that the company from which you're buying is, first,

6 off doing everything they can to minimize their own

7 emissions and their own consumption in their indigenous

8 operations, because I think she brought up a very salient

9 point which is if we're really serious about this and

10 we’re going to make a difference, we really do need to

11 get to 80 percent emission reductions from what we're

12 emitting today in order to stave off some severe

13 consequences. 

14 So, I think each consumer -- and what the FTC

15 can recommend is if it's important to you as a consumer,

16 you really need to take the effort to educate yourself

17 and you need to demand that your consumer products

18 companies take a part in educating you as well so that

19 they can tell you what it is that they're doing within

20 their own operations to minimize their energy consumption

21 and then what it is that they're doing outside of their

22 own operations to make an external impact, and only as a

23 final resort what role do offsets or RECs play in their

24 performance. 

25 MR. NEWSOME: Thank you. Okay, next we have
245

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Eric, Cameron, then Adam. And when you all answer, if

2 you could provide a brief explanation or just description

3 of the kinds of things, the kinds of information you

4 provide to consumers when you go to your website, the

5 things that you all have identified as important

6 information for them to have when they're looking to

7 choose these products. 

8 So, let's start with Eric. 

9 MR. CARLSON: I want to agree with what Matt

10 said and what Maurice from the EPA said before. If I can

11 take 30 or 40 seconds first, with additionality we need

12 to keep in mind that, I think Maurice pointed out eight,

13 if I’m not incorrect, additionality criteria, beyond

14 business as usual, baseline, not capped, no double

15 counting and several others. So, all of these

16 certifications have those built into it. 

17 What we're really struggling here with, and I

18 think Matt pointed out, is what about the criteria that

19 are strictly subjective that anybody could simply come

20 out and say, I do this and that's the right thing to do. 

21 I think everybody agrees in moving forward to promote

22 more carbon climate friendly projects that there has to

23 be a marketplace that we all understand and accept. That

24 means using objective criteria and not leaving it up to

25 the whims of certain folks to say, well, I think this is
246

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 wonderful and I say so. 

2 In terms of the information we provide to

3 consumers, when folks come and support us, we have a

4 number of projects listed on our website. We have

5 information about those. We have the project selection

6 criteria that we use. We have the verification report

7 like Terrapass does. Our financial audit is available. 

8 One of the things that makes carbonfund.org a little on

9 the unique side is we let consumers choose which types of

10 projects they support, whether it's renewable energy,

11 energy efficiency or reforestation. So, once you're in

12 there we're telling the consumer, based on that choice,

13 we're going to do this. So that means our reforestation

14 projects meet the Climate Community and Biodiversity

15 Alliance standards, our renewable energy is ERT certified

16 under Wiley's protocols, so on, so forth. 

17 So, I think providing that information is very

18 important. Certainly, for very large customers who

19 really want to select specific projects, we send them the

20 project design document and that sort of information. 

21 MR. NEWSOME: Okay, great, thanks. Cameron. 

22 MR. BROOKS: I'll try to answer a couple of

23 questions. As far as what I would say over the fence to

24 my neighbor, I really do think it comes down to

25 credibility and it comes down to a matter of standards
247

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 and to follow, perhaps, from the Google model of

2 searching, a lot of that credibility I think comes from

3 who is linking in to those standards, who is supporting

4 those standards, what does Environmental Defense say,

5 what does WRI say, what does the EPA say? How is the

6 general community responding to that? And I think that

7 in our current market that's the best measure of

8 credibility that's out there. And I think, also, I would

9 say to them it comes down to a matter of community. 

10 To answer your second question about what do we

11 see? With this disclaimer, I work on the supply side of

12 the business so I tend to get to opt out of a lot of

13 those conversations about exactly what we're saying. But

14 I know, for example, on our website whether this has

15 launched or will soon be launched, you heard my

16 disclaimer before so I can't quite say, but a lot of our

17 website presence is based around community and many of

18 our customers come to us from our commercial clients,

19 whether it's Whole Foods or Vail or Gander Mountain or

20 something like that, and they can choose to be affiliated

21 with that community and they can choose to be affiliated

22 with other communities much in the sort of peer-to-peer

23 networking way on the Internet. 

24 I think that that's important because when you

25 get down to the question of where the impact happens,
248

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 especially at the consumer level, I think it's fair to

2 say that the impact does not happen at the margin. It

3 pains me to be in front of, what is it, three projector

4 screens because I have a very cute picture of my kids

5 buying a wind power card, which is a product that we have

6 at Whole Foods Market and I always like to throw up

7 pictures of my kids in front of captive audiences. So,

8 it’s painful. But that $5 card, in and of itself, is not

9 going to lead to a new $2 million wind turbine being put

10 in the ground any more than when I go to Whole Foods and

11 I buy one tomato which maybe costs more than my wind

12 power card, I don't expect that there's a farmer at the

13 other end who plants another tomato because of that

14 purchase. 

15 But there is a power in community and there is

16 a power in being able to aggregate that demand and shape

17 that demand. So, I think a key question is will this

18 move it forward. 

19 And just to touch back, and I will wrap up, I

20 promise, on the question of additionality, I think this

21 is a very key concept because it’s very easy to paint the

22 picture of this wind farm was going to happen or here we

23 came along and it happened because of us or in the Prius

24 example. But I think in the project development world,

25 most project development and most financial investment,
249

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 in a larger context, happens with either a small or, in

2 most cases, a large degree of risk. 

3 Of the 2400-megawatts of wind that were put

4 into the ground last year, Lawrence Berkeley Labs did a

5 study and they showed only 20 percent employed at the

6 project level. So, most of that wind is going in with an

7 element of risk. 

8 I know that one of the partners we work with in

9 the wind space, they’re in the corn belt, they're a very

10 heavy fossil fuel industry player. They looked at a

11 project where they did not lock up the value of the RECs,

12 they did not enter into a forward agreement to sell the

13 RECs, but because of their experience with another wind

14 farm selling RECs, they felt comfortable about the value

15 of what they would be able to get if they moved forward. 

16 So, they could feel comfortable that they're financing

17 projections had an element of risk but were within a

18 comfortable range that they could approve that project

19 and it got put in the ground. 

20 Now, what happens with those RECs if they're

21 sold into the market? We have stipulated that they

22 cannot be considered to be additional because that

23 project was already built. I think we've lost an

24 opportunity, in that sense, to achieve the scale that

25 this industry is capable of achieving. So, for every
250

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 megawatt of wind that’s going in the ground there are

2 scores of fossil projects that are on the books or moving

3 forward. I think it's just very important that we

4 encourage the opportunity and we protect for the consumer

5 back to this idea before, the consumer wants to see

6 change. They want to see things moving forward, and that

7 is one of the things that the FTC and others can help

8 protect, the ability of the consumer to have an impact on

9 the market today. 

10 MR. NEWSOME: Okay, thank you. All right,

11 Adam, let's go to you. 

12 MR. STERN: Thank you. I wanted to build on

13 some comments Cameron made and some earlier statements

14 made this morning where a number of people described

15 carbon offsetting as a symbolic act. I think a number of

16 other people used the phrase, the warm glow that one

17 feels when one buys these or pushes the purchase button

18 on a website. 

19 But, in fact, as the Professor from Santa

20 Barbara said, we’ve studied our customer base and the

21 reality is that a lot of people out there who have seen

22 Al Gore's movie, they’ve watched what happened with

23 Katrina, they’ve seen the shifts in the weird weather,

24 it's 70 degrees on January 8th in Washington D.C., and

25 they want to get involved and start doing something now. 
251

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 Congress is having a useful debate on

2 legislation about how many tons should be reduced by 2040

3 or 2050, and that's great and that needs to happen. But

4 there are people and there are companies who want to take

5 responsibility for their share of the problem. They all

6 understood increasingly that we all, even if we try to

7 conserve, still have some dimension of a carbon

8 footprint. If you’ve conserved and you’ve taken those

9 steps, carbon offsets are a reasonable way to take care

10 of the rest for the time being until new technologies and

11 other things develop that will allow us to have an even

12 smaller footprint. 

13 Today, not everyone can afford to buy a Prius. 

14 I think our view is that there's nothing wrong with doing

15 what you can, offsetting the balance, educating

16 yourselves so that you learn more about what you can do

17 to be as environmental as possible. As long as the

18 offsets are independently verified, matched against a

19 standard, have clear dates as to when these projects

20 occurred, what kinds of projects there are, and an annual

21 audit that's published on the website or easily

22 accessible so that you know you really got what you paid

23 for. 

24 MR. NEWSOME: Thank you. So, we have about 15

25 minutes. We've got David next. I would like to get to
252

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 at least two things before we end. We may have time for

2 more. I would like David, in addition to the comment

3 that you're probably going to talk about, consumer tips,

4 but I would also like if you could give us some

5 information about the state perspective on these issues.

6 David is from an office that, a lot of the kinds of

7 things that FTC does on the federal level, they do on the

8 state level. The State AGs Offices and the Consumer

9 Protection Agencies are very important partners for the

10 FTC and they have the same kinds of experience in

11 addressing these issues and they're also a very similar

12 perspective from us. 

13 So, I'll ask David if you could address that. 

14 Then what I would like to do is because nobody seems to

15 want to talk about additionality, I would like for us to

16 talk a little bit about that, at least have a question

17 from me, a very specific question. There are so many

18 different views on additionality, and it’s an ongoing

19 debate and we’ve talked about all this. One thing that

20 there seems to be a general consensus about is the idea

21 that of regulatory additionality. If the activity is

22 required by regulation, then it shouldn't be used for

23 offset activity because it's something that would have

24 happened anyway. 

25 First question, is that the case? Is there a
253

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 consensus on that? And, second, would it be useful for

2 FTC to provide an example in its guidance of regulatory

3 additionality or is it such a no-brainer that it wouldn't

4 be helpful to anyone? 

5 So, let's start with David. And then if the

6 panelists could address that very specific question on

7 additionality that would be great. So, David.

8 MR. ZONANA: Sure. Let me start with your very

9 specific question. It strikes me that some of the

10 articles in the press that have been critical of the

11 voluntary offset market have cited examples where the

12 seemingly simple test of regulatory additionality hasn't

13 been met or the test of whether or not the project

14 already existed and whether it was business as usual had

15 not been met. So, I think it would be helpful to, in

16 some sense, state what is obvious to those in the room,

17 but not obvious necessarily to everybody thinking about

18 getting into the marketing of voluntary offsets, much

19 less the average consumer out there. 

20 You wanted me to talk about a state

21 perspective. Let me do that very briefly. I think we

22 are or will shortly be wrestling with the question of how

23 voluntary offsets fit in or exist in a compliance market. 

24 California may very well have a cap and trade system,

25 that's not determined by any means yet. But if it does,
254

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 does that mean that we would consider any projects in

2 California not fit for a voluntary market? And we just

3 haven't reached a conclusion on that question at this

4 point. 

5 We are, I think, taking a close look at, as are

6 other states, this voluntary offset market because it is

7 growing so fast, and picking up on something Adam said,

8 because it has broad implications for climate change

9 policy and the public support for climate change policy

10 in the long term. If there is a crisis of confidence in

11 the voluntary market, there's a concern that that would

12 bleed over into support for mandatory programs, for

13 mandatory regulation reducing greenhouse gases, and I

14 think that would be regrettable if we saw that. 

15 So, getting government involved, getting

16 enforcers involved, I think, is beneficial to this

17 market. The market is already doing a lot of things to

18 police itself as it matures, and we're certainly

19 interested in everything that's gone on in that front,

20 and we'll be talking to those who are both marketing the

21 products and those who are coming up with certification

22 and self-regulation regimes. 

23 MR. NEWSOME: Thank you. Wiley, let's go to

24 you. 

25 MR. BARBOUR: On the topic of regulatory
255

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 additionality, my first thought was, well, no, of course

2 you don't need to do that. Everybody agrees that a

3 project that’s required by regulation is not eligible for

4 participation in a market because it's already been

5 required. But then I thought, well, you know, it's not

6 quite that simple. 

7 We are developing an infrastructure and an

8 accounting system to enable us to have meaningful

9 environmental markets. Although we often talk about

10 renewable energy and greenhouse gas reductions as though

11 those were the only commodities, there are at least 71

12 programs in the U.S. and Canada for nutrient trading,

13 nitrogen or phosphorus trading within a watershed or a

14 tributary, and there are also trading markets for SOX,

15 NOX, and other local pollutants. So, really, the answer

16 of regulatory additionality becomes a little bit

17 complicated when you think about an project that may

18 impacted by regulations on dairies or on water quality or

19 on noise or odor abatement. 

20 So, it is a little bit nuanced and perhaps it

21 is something that would be useful to address. If a

22 project has multiple environmental impacts, and many

23 biomass projects do, and then they’re also subject to a

24 variety of different types of environmental regulatory

25 processes, landfills is another case where you might have
256

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 a variety of things that impinge on a project developer

2 and that would influence their decision to enter into

3 various permit conditions. The issue of was it required

4 is a little bit more tricky once you delve into those

5 details than might appear at first. So, I think perhaps

6 some looking into that would be important. 

7 Let me just say one thing, also, that I'm glad

8 that I heard I think Matt and others pick up on. I

9 didn't want my comments to suggest that we will not have

10 a viable and dynamic voluntary market on top of and side

11 by side with a mandatory market. I truly believe that. 

12 So, I didn't mean it to sound like I'm thinking of the

13 the voluntary market as just a ramp up to that mandatory

14 market. I do think it will be dwarfed in size by the

15 mandatory market, but if we can harness additional

16 activity, additional environmental benefit through

17 voluntary purchases and investments, that's a great

18 thing. So, that’s what we want to preserve, the

19 integrity of the voluntary market as we transition into a

20 mandatory market. 

21 MR. NEWSOME: Thank you. I think one thing to

22 keep in mind here is with this example that I have asked

23 about regulatory additionality and there are, as you

24 said, some nuances to it. But some of the examples we

25 have in the Green Guides are examples that if you put 50 
257

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 experts in the room they would all say, well, obviously

2 you don't make that kind of claim. But at the same time,

3 having that example in there would be helpful to new

4 market entrants and others involved that don't have as

5 much knowledge or maybe more of a casual acquaintance

6 with what's going on. 

7 So, let's go with Matt next. 

8 MR. CLOUSE: Just to add further to that, we

9 get a lot of calls at the Green Power Partnership at EPA

10 about what counts and this issue still comes up of

11 whether or not they can count. The renewables that they

12 already get in the products they buy from, the product

13 they would get otherwise when they buy electricity, and

14 the answer is no and we have to explain why. But let me

15 further say that don’t just limit it, the regulatory

16 additionality discussion to a renewable portfolio

17 standard. There are other issues that come up as well. 

18 Consent decrees and others, we're happy to provide you a

19 longer list, but those things should also be filtered out

20 in that regulatory additionality test. 

21 MR. NEWSOME: Well, one example I hear from a

22 lot of people are the regulated and non-regulated

23 landfills in terms of methane capture. So, there are

24 probably several different examples there. 

25 Let's go to Anja. 
258

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 MS. KOLLMUS: I get to talk about additionality

2 again, my favorite topic. A couple of things, what

3 Cameron and Matthew said about things being more complex

4 than my example indicated, my Prius example, that's

5 absolutely true and that's definitely true for the REC

6 market, how projects are financed very much have an

7 impact on the viability of the project itself. 

8 In a way, also, the flip side of having very

9 stringent additionality requirements is that you

10 potentially punish someone who is a very good project

11 developer. If you have a project developer say somewhere

12 in India that really wants to bring this biomass project

13 online, and they're just a really creative entrepreneur

14 and they're going to say I'm going to do this because I

15 know it's good thing no matter if I can sell offsets or

16 not. So, it is a complex topic and there's always

17 several sides to it. 

18 In terms of the regulatory test, I think it's,

19 in theory, very accepted and, in some instances, very

20 simple, say with methane projects from landfill. If it’s

21 required by law, then you cannot sell offsets from it. 

22 It is though, as all things related to additionality,

23 more complex than that. 

24 One is the potential perverse incentives you

25 create by the offset market. So, if you have certain
259

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 regions who don't have legislation and then can sell

2 their offsets, those landfill owners are very likely

3 going to be opposed to regulation that are going to force

4 them to do that because they would lose the revenue

5 stream. 

6 A second example which shows that the

7 regulatory test is not always that simple, this is a

8 hypothetical example too. If you have a city that has a

9 commitment to reduce their emissions, and within that

10 city, you have a company that is a member of the Chicago

11 Climate Exchange and they are doing a very good job at

12 reducing their emissions and they want to sell their

13 excess, they have exceeded their goal and they want to

14 sell their excess allowances through the CCX market. 

15 Well, the city is going to look at the inventory, they're

16 going to do a citywide inventory to see if they met their

17 commitment and they are, of course, going to look at the

18 reduced emissions from that company. So, should that

19 company then be able to sell their excess reductions

20 through CCX? If yes, then they would be double counted. 

21 There's no simple answer to this and there are many

22 examples like that. 

23 MR. NEWSOME: Okay, well, thank you. Let's go

24 with Eric and then Cameron, and I guess that means,

25 Cameron, you will have the last word. One thing to think
260

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 about with this additionality example that I’ve thrown

2 out is, from the FTC's perspective, what I'm essentially

3 asking is if you sold an offset and you just made a

4 generic claim about the offset and it was based on say a

5 landfill that was regulated and EPA or the state or

6 whatever required methane capture, would the sale of that

7 offset and the claims, would those be deceptive to the 

8 consumers? 

9 The missing step there is, well, that kind of

10 assumes that the consumer has a general idea about an

11 expectation about additionality. So, there is a lot

12 wrapped up in this example. 

13 So, let's go with Eric and then Cameron. 

14 MR. CARLSON: I think you’ve raised a really

15 important point about what we can define and what we

16 can't. And I don't know of a certification body that

17 would allow the sort of project that you're referencing. 

18 I guess it could happen. 

19 And the other thing I think, as Anja and Wiley

20 and others have pointed out, is you can see how this

21 stuff can suddenly get very complex on one of the

22 objective additionality criteria. All the more reason

23 why I think we need to have technical experts dealing

24 with this, dealing with this in papers and in symposiums

25 and things like that and really talking about this. 
261

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 But let me paint a different scenario and that

2 is, can you imagine if all of the marketers here on the

3 stage or out in the audience or around the country all

4 had their own standards, did their own verification, did

5 their own certification, had their own definitions of

6 additionality and so on and so forth. One of the things

7 that you rarely hear in the discussion about 

8 additionality that I would like to ask people is just 

9 define it. The EPA did a great job today defining what

10 they mean by additionality. Green-e defines what they

11 mean by additionality. Wiley does the same thing. To

12 simply say wouldn't have happened anyways isn't a

13 definition that any project developer can take to a bank

14 and say we meet this threshold. 

15 So, that's another reason I think we need to

16 get away from these subjective areas, away from allowing

17 non-disinterested parties to define their own way around

18 this. That's why I guess I have said it a number of

19 times today and I'll just repeat it and be quiet, that I

20 think third party certification answers the question is

21 it real and who says so and what's behind it. 

22 MR. NEWSOME: Okay, thank you. Cameron, you

23 have an opportunity, if you can keep it under a minute

24 you’ll give your friend Adam a chance to speak. He has

25 his card up to add another comment. Then we’ll wrap it
262

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 up. 

2 MR. BROOKS: I think you asked a question after

3 the question about regulatory additionality, but, quite

4 frankly, I didn't hear it because I was so flustered by

5 the idea that I was going to have the last word. So, I'm

6 glad you'll be taking the last word. 

7 But on that question, to me, it comes back

8 standards and I don't know of a credible standard that

9 would suggest that regulatory additionality is not a

10 concern. So, I'm inclined to suggest that it's not an

11 important thing to include as a specific guidance in the

12 FTC as long as you have included guidance to go to those

13 standards. Again, none of those would include that. 

14 But as I was thinking about the last word, I

15 will offer up this last word and then I’ll hand it over

16 to Adam, which is, again, I would come back to the FTC

17 has a great opportunity and I hope it’s seized upon to

18 protect the consumer. I mean, there's a track record

19 that in my personal life I come back to, not having to

20 suffer the indignity of getting up in the middle of

21 dinner to answer a telemarketing call. 

22 I suffer other indignities at dinner like

23 having my son throw food on me or, as I was coming out

24 here, giving a civics lesson to a four-year-old girl who

25 wanted to know what a capital was and she asked me
263

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 earnestly, daddy, is that where the king lives? I tried

2 to explain, no, despite what any individual politician

3 might think, we don't have kings here, we have

4 presidents, and then that led to a question, which,

5 honestly, if anyone here can help me answer, I couldn't

6 answer, which is what's the difference between an emperor

7 and a king. 

8 So, usually when I get to these more

9 philosophical, but clearly unanswerable questions on my

10 part, my daughter has a great fondness for Yoda, and I

11 would said that's the kind of a question that a Jedi

12 master can answer. It seems to me with the discussion of

13 counterfactuals and additionality and all that, we really

14 do have a great need for a Jedi master that can answer

15 some of these questions for us. 

16 In the absence of that, we do have at least one

17 man in a green tie which is close to Yoda. So, maybe in

18 the interim, you can fill some of that void, and it's all

19 you. 

20 MR. STERN: All right. I do a Yoda imitation,

21 but...I want to thank the FTC and the staff for preparing

22 the session. I think it's been enormously informative

23 and I think it’s worth stepping back for one minute,

24 perhaps as a closing thought, and recognizing that this

25 is an emerging industry, it's still at a relatively early
264

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 stage. But even in the last year, there's enormous

2 progress made on a lot of levels. 

3 You have some top rate providers that have

4 served customers probably now in the hundreds of

5 thousands, customers who have been given a chance to get

6 more engaged in solutions to global warming. You have

7 two very respected accrediting bodies in Green-e and VCS

8 that, working through hundreds of public stakeholder

9 comments, have developed strong standards that now are

10 available for the market to use. You have people getting

11 more educated to the point that the word “carbon offset”

12 makes it into the Oxford Dictionary as the word of the

13 year. You have a constituency that’s building in this

14 country in part because people are buying offsets, that

15 is pressuring Congressmen and Senators to take action on

16 this larger problem. 

17 And, so, for those reasons, I hope the FTC will

18 do as much as it can to nurture this industry to help

19 strengthen it. There's a lot of good that can come out

20 of it with all the provisions of consumer protection that

21 can ensure people get a good deal, they know what they're

22 paying for, it's verified, it's publicly disclosed. 

23 This is one of the more encouraging

24 developments in my estimation in terms of where we're

25 really going to move, if we're going to get our arms
265

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 around this whole problem of climate change. I hope the

2 FTC will help support that movement. 

3 MR. NEWSOME: Okay, well, thank you. I want to

4 thank everyone for participating today. This has been

5 very useful. Thank you for coming and have a good

6 evening.

7 (Applause.)

8 (The workshop was concluded.)

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25
266

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

1 C E R T I F I C A T I O N O F R E P O R T E R

2

3 MATTER NUMBER: P954501 

4 CASE TITLE: ENVIRONMENTAL MARKETING GUIDES REVIEW 

5 DATE: JANUARY 8, 2008 

6

7 I HEREBY CERTIFY that the transcript contained herein

8 is a full and accurate transcript of the notes taken by me

9 at the hearing on the above cause before the FEDERAL TRADE

10 COMMISSION to the best of my knowledge and belief.

11

12 DATED: JANUARY 22, 2008

13

14 

15 ROBIN E. BOGGESS 

16

17 C E R T I F I C A T I O N O F P R O O F R E A D E R

18

19 I HEREBY CERTIFY that I proofread the transcript for

20 accuracy in spelling, hyphenation, punctuation and format.

21

22 

23 ELIZABETH M. FARRELL

24

25