Offsetting Carbon in a Voluntary Market

An Interview with Adam Stein, VP of Marketing at TerraPass

 

Founded in 2003, the Chicago Climate Exchange (CCX) is the world’s first voluntary exchange for registering and trading emission allowances for gases that cause climate change.  What does that mean?  Exchange members as diverse as Ford, DuPont, IBM, Waste Management, Safeway, Tufts University and the City of Chicago have made a voluntary but legally binding commitment to reduce carbon emissions, and then trade on the exchange to meet those commitments.  If members reduce emissions below target levels, excess permits – or rights to emit carbon – can be sold on the exchange.  If they exceed target levels, they must purchase permits to do so.

 

CCX was modeled after an earlier market-based success story – established by Title IV of the 1990 Clean Air Act – that facilitated the reduction of sulfur dioxide (SO2) using transferable emission allowances.  A cap and trading system was established whereby a target level was set, and utilities bought and sold allowances to emit SO2 under the cap. 

By any definition, the market-based approach for reducing SO2 was an overwhelming success.  As Dr. Richard Sandor, Founder, Chairman and CEO of CCX, states, a cap and trade system enabled “faster-than-required pollution cuts at far lower cost than predicted”.  Indeed results were impressive: an Environmental Defense Fund report estimates that actual emissions were 30% below target levels, while Carlson et. al., estimates that a trading system saved $700-800 million annually over similar command and control systems.

Yet, given that carbon reduction is primarily done on a voluntary basis in the US (at least until this past September when California passed legislation to reduce greenhouse gases), it more challenging to gain buy-in.  Nonetheless, CCX has enjoyed remarkable success, with nearly 9 billion metric tons of carbon traded to date.

TerraPass effectively serves as an intermediary on this exchange, enabling individuals and non-member companies to offset the carbon emissions they are responsible for by buying and holding (rather than using) allowances to emit carbon. 

 

Lately, it has enjoyed remarkable growth in its business.  Corporation such as Patagonia buy permits through TerraPass to offset emissions from their operations.  For such corporations, carbon offsetting can have strategic importance.  Not only can reduced carbon emissions result in significant cost savings (say from reduced energy use) but it can generate positive PR.  It also recognizes the inevitable: that the US will one day join the rest of the global community and require reductions in climate change gas emissions.  An exchange enables corporations to legally document the reductions they make today, with the expectation that such reductions will likely be taken into consideration when carbon level baselines are set in the future.

 

In addition, individual consumers are increasingly holding themselves accountable for their activities by buying carbon offsets for their carbon-emitting activities including driving and flying.  According to TerraPass’s website calculator, for example, if you drive a 2006 Honda Civic 12k miles per year, you are responsible for emitting 6,710 lbs of carbon a year that can be offset for $39.95.  Yet, if you drive the Civic Hybrid instead, you would be responsible for emitting 4,695 lbs of carbon – or over 2,000 fewer lbs of carbon than with the conventional Civic.  This carbon could be offset for just $29.95.

 

For consumers, the rationale for carbon offsetting is less intuitive, as the benefits from an individual’s efforts are neither immediate nor enjoyed exclusively.  For some, there is a “moral imperative” to lessen the impact of climate change, as Al Gore suggests in An Inconvenient Truth.  For others, US inaction has caused deep frustration and a sense of not being in control.  Carbon offsets have provided a way to retake control.  Yet, regardless of the underlying reason, individuals are increasingly taking action, and turning to companies like TerraPass to do so.

 

I recently had the opportunity to speak with Adam Stein, VP of Marketing for TerraPass about evolving consumer attitudes, its recent deal with Expedia and its efforts to sell carbon offsets in the voluntary US market.  Here is what he had to say:

MG: What is the level of awareness for carbon offsetting as a response to global warming, and specifically, for the TerraPass brand?  

AS: The overall awareness of carbon offsets in the US is low, especially in comparison to Europe.  They are obviously operating under a carbon constrained economy and have a better sense as to what carbon marketing means.  In the US it is still a foreign concept.  If this is any gauge, I still draw a lot of blank stares at cocktail parties when I tell people what I do for a living.

 

Yet, having said that, I will tell you that more and more people are hearing about TerraPass.  In particular the Expedia deal has given us a lot more name recognition. It is one of the first and the best example of the voluntary carbon market breaking into the mainstream audiences.

MG: What does that deal [with Expedia] do for you? What about for Expedia? 

AS: So for us, the deal has been incredible.  When we signed this deal, we thought it would be a credibility booster, rather than a driver of sales.  I never expected people to dig through the list of options to find an item that few people had ever heard of and add it onto their purchase.  They did and have done it in large numbers and it has been pretty remarkable.  Not only that, but this was a different audience we were talking to, a more mainstream audience.   

 

What does [the deal] do for Expedia?  There are a lot of benefits for them.  Certainly, there is a public relations benefit.  Beyond that, this has been a big morale booster [for Expedia], as well as a very useful tool in recruiting.  It’s just something that they are generally excited about – all they way up to the CEO.

MG: Has this driven customer loyalty for Expedia whereby consumers are coming back to purchase a plane ticket with an offset?

Anecdotally, we definitely think that is true, though it has not been measured directly yet.  But, based on focused groups that we have done and emails we have received about repeat purchases, I believe that it has.  It can not be taken for granted that carbon offsetting projects will be received positively. I am not sure if you saw any of the fallout when Whole Foods launched a wind power card.  [Whole Foods sold wind credits from Renewable Choice or REC via a stored value card that was not well received or understood by the blogosphere]. 

MG: How do you differentiate between what happened with your deal with Expedia and REC’s experience at Whole Foods?

AS: First of all, we have staunchly defended Whole Foods and REC in our blog.  So we have carried a lot of water for one of our competitors.  But, it is such a small industry and we are all in it together. Honestly, one thing to bear in mind is that the controversy happened in the blogosphere – which does not necessarily reflect the real world.

 

One thing that TerraPass did differently was to link the offset directly to consumer behavior – which is something that people seem to be more comfortable doing – rather than buying them as a stand alone item. 

MG: So what is the key learning from your success with Expedia?  

As the number one thing that it has demonstrated is the demand. When these options are presented in a way so that consumers know what they are getting, there is demonstrated demand. 

MG: The Expedia deal embeds carbon offset as a consideration when conducting a transaction for plane tickets online.  What about other online purchases, say for consumer electronics?

My guess is that choices in the consumer electronics world are not yet driven by these environmental considerations and it might be a head scratcher to most.

MG: How has the consumer target evolved?  You would assume early adoptors would be more green-focused while those that purchased from Expedia are more of a mass audience.  Has the audience changed?  

It is commonly assumed that the early adoptors have been ‘deep greens’ as we call them.  Somewhat surprisingly, this has not necessarily been the case actually.  A lot of our early adoptors were techies interestingly enough.  And that make some sense.  They tended to be young, professional, male, relatively high earners and interested in technological solutions to problems.   It did not trouble them that there was a financial mechanism being applied to an environmental problem. 

 

Moreover, it was certainly affordable.  They were certainly aware of and concerned about environmental issues but weren’t necessarily willing to make huge lifestyle commitments.  For thirty six bucks a year, they were interested in supporting wind energy or supporting efficiency.

 

With that said, we do see large support from deep greens.  Interestingly, they are a harder customer to sell to because they have a lot of questions.  But once turned on to the concept, they are very devoted.

 

I think what were are now seeing is more of that ‘soccer mom’ segment: Socially aware, almost constrained to a certain degree in lifestyle choices by all of the trappings of a typical American existence and are excited to have this option for that problem.

MG: Is there a different message that resonates with ‘soccer moms’ or is it simply a matter of making them aware of this option?

AS:  We basically have one message [across segments]: this notion that we all contribute to global warming but there is something that you can do now and that something is affordable and real.  And that is something that resonates with a lot of people.

 

MG: Is the market creating a tailwind?

 

I think absolutely there is a tailwind. I think that there is a growing awareness in America that global warming is real and is a very serious problem.  And beyond that, our country is not leading the world but lagging the world and that creates sort of tension and frustration in a large number of people that feel helpless because it is very difficult to move the needle when you know that we create 25% of GHG emissions and so far seemed very uninterested in joining the conversion that the rest of the world is having.  And that has made the market ripe for voluntary carbon offset.

MG: Does interest differ across geographic regions?

AS: Less that you would think.  You are probably assuming that we sell solely in San Francisco and Seattle. We do overweight on the coasts and in urban areas, but again, less that you think.

MG: What tactics do you use to drive traffic to your site?   

AS: We do some small ad buys online, but we primarily rely on guerilla marketing.  We are a boot strapped company.

MG: Tell me about your guerilla marketing efforts? 

AS: It is mostly word of mouth.  We have a blog and a newsletter which actually has quite a large readership.  Obviously, PR has been enormously helpful for us.  The press interest has been phenomenal as everybody is interested in what is going in the world of carbon. 

MG: How do you engage prospects on your site? 

AS: The carbon calculators are definitely a key engagement mechanism.  We are all about that tangible link and the calculator makes it very real for people.  They type in their information and it spits back their exact carbon footprint.  It also lends credibility to the site when [the visitor is] able to see the number there.  Every product launched since has had a more elaborate calculator attached to it.  

MG: Where do you go from here?

AS: This market is extremely fluid because it is wrapped up in so many legislative and cultural issues.  I have no ideal what TerraPass will look like when it grows up. Everyone in the industry feels like the endgame is about making meaningful progress in America on global warming.  This is not a sales goal but more of a high-minded goal.  Hopefully, we will get there.

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