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Solana Beach firm closes large carbon offset transaction

A local investment firm said it closed the largest carbon offset transaction in the United States earlier this week, further expanding on its commitment to what it believes will be a vibrant domestic and regional market.

“We’re buying these credits before there is a ton of demand,” said Greg Arnold, managing partner of CE2 Capital Partners. “What we’re doing is making a long-term bet that these credits will be considered valuable.”

Solana Beach-based CE2 Capital Partners invested in $12 million of carbon offsets originating from Blue Source’s portfolio of emission reduction projects, including forestry, landfill gas and coal mine methane.

The deal is a large one for this small, early market, which more often sees transactions less than half that size, Arnold said.

“This transaction also expands the U.S. carbon offset market by better defining transaction structure and value, enabling capital to flow more freely,” he added in a statement.

Goldman Sachs (NYSE: GS) structured and marketed the Blue Source offsets.

A carbon credit, or offset, assigns value to a designated unit of carbon emissions and is sometimes regarded as a permit to pollute.

In the simplest sense, companies can buy or sell these credits depending on whether they are emitting too much or have managed to cut emissions; others, like CE2 Capital Partners, see the credits as an investment or financing vehicle for emission-reduction projects.

Thus, some proponents tout carbon credits as a way to coax companies to become “greener” and as one tool for combating climate change.

As for CE2 Capital Partners, the firm anticipates being able to create reductions less expensively and then offer the offsets to companies and industries that need to purchase additional credits.

CE2 Capital manages hundreds of millions in assets, according to Arnold, but often fills additional roles of real estate manager, project originator and developer in its carbon-themed investments.

“We’re a hybrid,” Arnold said. “You have to be vertically integrated in this type of an early market to capture the best opportunities.”

As Arnold himself notes, though, the success of his firm’s investments depends a lot on cap-and-trade policies becoming far more widespread.

Cap and trade refers to programs that set a mandatory limit on emissions while allowing those under the restrictions to trade credits or offsets to comply.

Such a system is already in place in Europe, which established the European Union Emission Trading System shortly after the Kyoto Protocol was set in motion. Under the EU ETS, governments distribute a certain number of free credits, and emitters buy or sell them to meet caps.

On the domestic level, two climate change bills -- Waxman-Markey and Kerry-Boxer -- are currently working their way through Congress; both include provisions for cap and trade or “pollution reduction,” depending on the speaker’s terminology of choice.

Arnold hopes to see something passed as early as the first or second quarter of next year.

In the meantime, regional cap-and-trade programs are being established. In the Northeast, 10 states joined together to form the Regional Greenhouse Gas Initiative last year. Unlike the EU ETS, RGGI auctions emissions allowances to electric power generators, which buy, sell and trade the allowances.

California and other Western states -- known as the Western Climate Initiative -- also are moving toward enacting cap-and-trade policies. California legislators, in particular, are operating under the ticking clock of Assembly Bill 32, which stipulates that greenhouse gas emissions must be reduced by 30 percent by 2020 and by 80 percent by 2050.

A state cap-and-trade policy will likely be passed within five years to allow enough time to meet rapidly approaching AB32 goals, said Mark Jacobsen, assistant professor of economics at the University of California, San Diego.

“The polluters are not interested in doing anything until there’s a government program,” he added.

A “voluntary market” also has emerged, most recently highlighted in San Francisco’s efforts to give travelers the opportunity to put money toward offsetting the carbon emissions of their flights.

Most market players and observers agree that in spite of the growing voluntary market, a cap-and-trade system needs to be put in place for the market to see substantial growth and viability.

However, this is easier said than done: People on both sides of the issue argue over whether a cap-and-trade system is even effective and how it could be best implemented.

Advocates debate as to whether permits should be freely distributed or auctioned off and how many permits should be created; allocating too many credits would likely fail to reduce emissions altogether.

Others point out that reductions need to be examined to ensure that they were intentional and would not have happened anyway, like the phasing out of old equipment.

A few industries are lobbying to be exempt from emission limits. There also is concern that the additional cost will be passed down to consumers.

Some say that instead of cap and trade, the government should be mandating use of green products, rationing energy or levying a carbon tax.

“There are clearly winners and losers in this,” said Richard Carson, a UCSD economics professor.

He noted that even oil companies come down on different sides of the issue: Exxon-Mobil owns a lot of coal, which will need the most carbon offsets, while Shell-British Petroleum owns more natural gas, which will be more valuable in a cap-and-trade system.


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