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Two high-profile capital investment firms are banking on a privately owned Utah company to help them become major players in the emerging greenhouse gas and carbon trading markets.
Since last summer, Goldman Sachs Group Inc. and Och-Ziff Capital Management Group LLC together have committed more than $1 billion to a Utah company called Blue Source LLC in an effort to establish a foothold in the potentially lucrative carbon-trading marketplace.
In August, New York-based Och-Ziff committed up to $500 million (with an additional $500 million available) for new greenhouse gas reduction projects to be managed in partnership with Blue Source.
Two months later, Goldman Sachs bought a minority stake in the Holladay carbon-management firm for an undisclosed amount. The deal represented an equity stake of less than 10 percent, said Bill Townsend, co-founder and chief executive officer of Blue Source. Townsend declined to comment on the financial terms of the deal.
“As European and now U.S. regulators adopt regulations addressing climate change and create a market for carbon, we are developing new products to address these new commodities risk to our clients,” a Goldman Sachs spokesman said in an e-mail to the Deseret News regarding the decision to form a business alliance with Blue Source. “The alliance, which will offer our clients access to a diverse selection of emission reductions to manage their carbon risks, is one of the key components of our carbon strategy in the U.S.”
As Utah and the rest of the nation consider ways to reduce its carbon footprint, companies like Blue Source have developed technologies that mitigate carbon emissions. Townsend said he is hopeful the U.S. will follow the lead of Europe, which has begun its own regulated carbon-trading market, permitting entities to buy and sell credits or reductions as a way to reduce the amount of greenhouse gas emissions into the atmosphere.
Though some analysts have supported the idea of a federally regulated American carbon-trading market, critics have expressed concerns about how well such a program would work when put into practice. Would it be administered fairly? And would trading carbon credits on the open market achieve the desired result of mitigating climate change and reducing the amount of pollutants in the air?
Regulating the market
Currently, there is no nationally regulated carbon-trading market, though companies are able to exchange carbon offsets on their own. A carbon offset is a financial instrument representing a reduction in greenhouse gas emissions.
One carbon offset represents the reduction of one metric ton of carbon dioxide, or its equivalent in other greenhouse gases.
The two primary markets for carbon offsets are the larger compliance market and the smaller voluntary market.
In the compliance market, companies, governments or other entities buy carbon offsets in order to comply with caps on the total amount of carbon dioxide they are allowed to emit into the atmosphere. In the voluntary market, individuals, companies or governments purchase carbon offsets to mitigate their own greenhouse gas emissions from transportation, electricity use, industrial production or other sources.
Last week, Blue Source announced the first issuance of U.S.-based greenhouse gas offsets from projects approved by the Voluntary Carbon Standard. The offsets totaled more than 1.6 million voluntary carbon units, according to a news release.
The offsets were registered on the VCS Registry system, a global benchmark standard for voluntary greenhouse gas emission reductions and removals developed by The Climate Group, the International Emissions Trading Association and the World Business Council for Sustainable Development, along with numerous business, government and non-government organizations, the release said.
“Interest in the pre-compliance carbon market in the U.S. is growing rapidly, and we are excited to be able to offer our clients immediate access to a diverse selection of emission reductions to manage their carbon risk,” said Leslie Biddle, Goldman Sachs’ global head of commodity sales.
Europe already has a regulated carbon-trading market the European Trading System that has drawn some criticism from analysts and observers.
Hans Ehrbar, economics professor at the University of Utah, said the European market has had its share of issues since its inception in January 2005.
Carbon credits were initially dispersed for free, Ehrbar said, with most of the available credits allocated to companies that were already among the biggest polluters in Europe. Issuing valuable credits at no cost to companies because they were responsible for the greatest amount of carbon emissions was a flawed strategy on the part of European policymakers, he said.
“The fair way would be to have those carbon credits auctioned off so that everyone who needs them has to pay for them,” Ehrbar said. “Basically, they want to buy the support of the big polluters for programs like this.”
Cap and trade
Ehrbar also expressed concern about a proposed “cap-and-trade” program that would take an administrative approach to control pollution by providing economic incentives for achieving reductions in the emissions of carbon pollutants.
During a nationally televised February speech to Congress, President Barack Obama voiced his administration’s support for the development of a cap-and-trade system to mitigate greenhouse gas emissions. The U.S. Environmental Protection Agency defined cap and trade as “a market-based policy tool for protecting human health and the environment.”
The cap-and-trade program favored by the president would set limits on carbon-dioxide emissions and let companies trade pollution allowances on a market.
That approach is also favored by state energy advisor Dianne Nielson, who told the Deseret News that a potential carbon-trading market could be the key to a successful emissions reduction program in Utah.
“The market forces, we believe, are in fact the best approach in terms of looking at the value and reduction of CO2 and other greenhouse gases,” Nielson said.
An important component of any market-based plan, she said, would be the ability to verify the existence of offsets.
“The climate registry is one mechanism where you can provide information on carbon reductions,” Nielson said.
In addition, there should be an independent audit process that would verify that the actual carbon reductions were truly achieved and long-lasting, she said.
“That’s something that’s going to be important to all state agencies as we move forward in carbon management,” Nielson said.
Taking initiative
Utah is among the seven American states and four Canadian provinces involved in the Western Climate Initiative, she said. WCI was created to identify, evaluate and implement collective and cooperative ways to reduce greenhouse gases in the region, focusing on a market-based cap-and-trade system, according to its Web site, www.westernclimateinitiative.org.
Members of the Western Climate Initiative include Arizona, California, Montana, New Mexico, Oregon, Utah, Washington, British Columbia, Manitoba, Ontario and Quebec.
Nearly 90 percent of the greenhouse gas emissions in the states and provinces will be covered by the cap when it is fully implemented in 2015, according to the Web site.
The plan has drawn opposition from some observers, including many members of the Utah Legislature.
According to the Associated Press, a Colorado-based business group issued a report last year criticizing a carbon-trading plan offered by the seven U.S. governors and four Canadian provincial premiers, saying it would be ineffective and would discourage investment.
The Western Business Roundtable report, issued in September 2008, took aim at the Western Climate Initiative, claiming the plan was based on “problematic assumptions.”
The Denver-based Western Business Roundtable includes CEOs and leaders of organizations doing business in the West.
Setting limits, reaching goals
Environmental advocates note that the development of carbon-trading markets in North America has already begun and could increase with continued support from the new presidential administration.
“Even if it doesn’t happen at the national level, there are various proposals for regional cap-and-trade programs,” said Bill Magavern, director of the California chapter of the Sierra Club.
A small program exists in the Northeast, but it “only applies to power-plant emissions,” Magavern said.
Because the limits or cap imposed on the emissions in that program were so high, meaning they were too lax, he said, the impact on the environment would likely be minimal.
For any cap-and-trade program to be effective, realistic limits need to be required and “the polluters should have to pay for” any allowances or credits they would have under the system, Magavern said. An auction would be the best way to distribute those credits, with entities holding surplus offsets able to sell them or preferably retain them, he said.
Trading on the open market would probably be minimal if companies were required to purchase offsets, Magavern said, because it would be in their best interest to keep them in order to reduce their future greenhouse gas output.
“We don’t think the goal is to have trading,” he said. “The goal is to bring emissions down. … You need to have a system that’s got strong oversight by a governmental entity to make sure that any kind of offsets are permanent and verified.”
An emerging market
In the United States, credits or offsets from projects that reduce global-warming gases are voluntarily traded by companies and others seeking to enhance their environmental image. Congress is debating legislation that would mandate emissions reductions, a move that could expand the market for the type of credits offered by Blue Source.
More customers are buying emissions credits with the expectation that they may be used to meet mandatory pollution targets in the future, Townsend said. Credits from projects that destroy methane from landfills or that capture and bury carbon dioxide underground are worth about $10 a ton, less than half the cost of credits in the European Union greenhouse gas market.
With its strong financial backing, Blue Source is poised to become one of the biggest players in the emerging world of climate-change capitalism in the U.S. and abroad. The firm has developed technology that captures carbon dioxide emissions from various industrial production processes, including methane gas from coal mining, wastewater treatment, landfills and animal waste, as well as storage of carbon dioxide from fertilizer, natural gas production and industrial gas destruction.
Building Blue Source
Prior to his involvement with Blue Source, Townsend was co-owner of seven energy or environmental businesses. He said that he performed his first carbon trade in 1996, but little did he know that it would lead to the opportunity that was before Blue Source today.
“We were the second one in the nation done,” he said. Since then, his companies have developed carbon-reduction projects in several states, including Kansas, Louisiana, Texas and Wyoming, Townsend said.
Eventually, that experience served him well as he watched the climate market grow and then met the man who would become his friend and business partner.
Greg Spencer, Blue Source’s president and co-founder, said he came upon the partnership opportunity after his job was eliminated following a merger.
“He and I got together and decided to build a business with the objective of creating the largest, most diversified carbon portfolio in North America,” Spencer said.
When they started out in 2000, there were few people who even comprehended the idea of carbon trading, he said. Traditional pollutants such as sulfur dioxide and nitrous oxide had already been trading under the Clean Air Act for some time.
“Very few people in the U.S. had heard about or been involved with trading of greenhouse gases,” Spencer said.
Townsend and Spencer got together in the fall of 2000 and decided on a corporate business plan to build a portfolio based on the development of carbon trading, Spencer said. Soon after, they introduced the concept to executives with large companies such as Tyson Foods, trucking firm J.B. Hunt, International Paper, energy company Kinder Morgan and Albertsons.
Spencer described them as “big organizations with huge energy footprints” that presented the opportunity for significant reductions in carbon emissions.
“We put together a business approach that enabled us to take all of the up-front costs and a significant amount of the risk, and really just give them the opportunity to participate,” he said.
Townsend said they typically look for “large single-point sources of carbon dioxide that are being emitted into the atmosphere.”
That would usually be large facilities such as refineries, natural gas treatment plants or other industrial facilities.
Leading the way
Currently, the company has more than 30 projects in nine states across the country, Townsend said. The only Blue Source-built project located in Utah is a small hydro-electric generator at the Big Canyon Ranch in the Summit County town of Wanship.
The 3-kilowatt generator was constructed with funds donated by Blue Source and utilizes an underground stream to supply a clean source of energy that provides all of the electricity needs of the 1,500-acre Christian adventure retreat, director Brian Zwahlen said.
With its experienced leadership and proven technologies, Blue Source is already one of the top carbon-management companies in the nation, Townsend said, and he’s excited about the prospects for growth in the coming years. He said it was his company’s overall profitability that piqued the interest of investors such as Goldman Sachs and Och-Ziff that resulted in the current billion-dollar business relationships.
Blue Source’s alliances with major capital firms could help the company become a global leader in carbon-management industry, he said.
“In a very positive way, we are leading the way in climate change, and the state should be proud of that,” Townsend said.
Contributing: Arthur Raymond, Deseret News; Bloomberg News. E-mail: [email protected]
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