The Climate Trust: Blazing The Oregon Carbon Trail

With all eyes turned to California, it’s easy to forget that the state’s northern neighbor actually passed the first state-level legislation to curb carbon dioxide (CO2) emissions in the United States (US).

The Oregon Carbon Dioxide Standard, passed in 1997, requires new energy facilities in the state to meet an emissions standard 17% below the best-existing plants in the US. Effectively, this means that power plants have to either adopt mitigation technologies on-site or purchase offsets generated from off-site projects.

As might be expected, the new power plants were hardly pleased about venturing outside their expertise and into the nascent carbon market of that time. In response, the state offered a third option: a “monetary path”, where plants could provide funding to a state-recognized non-profit that would select and manage carbon reduction projects on their behalf.

To date, every regulated entity has chosen this path, which marked the beginnings of The Climate Trust (TCT).

Starting from Scratch

TCT has been the only non-profit to take up Oregon’s offer to work as a recognized carbon offset manager. Yet even without competition, trust officials had their work cut out for them, as carbon projects were more of an idea than actuality back in the 1990’s.

When the organization received its first contract from a new power plant back in 2001, it had only two years to commit $600,000 to projects. There was only one problem:

“When we first started getting money, there wasn’t a lot [of projects] out there,” said Sheldon Zakreski, Director of Programs.

TCT’s unique funding structure meant that the organization “sees part of our role as improving capacity building. Through the Oregon program, we are in a position where we can afford to look at new standards.” This unusual combination of guaranteed funding, but quick turnaround demands resulted in an organizational culture that embraces trailblazing to this day.

Yet while the monetary pathway offers a windfall of cash, there’s a catch: the funding only appears with the construction of a new power plant.

“It’s a boom-and-bust cycle,” said Dick Kempka, Vice-President of Business Development. “We went two to three years without money; then two facilities were announced, and we were flush with money again.”

Given this particular challenge, TCT decided to start consulting and looking into other revenue sources about four years ago. Those sources were easy enough to find: corporate buyers had expressed interest in offsets, believing that if they were good enough for a regulated market, they were good enough for voluntary purchases. But it was California’s announcement of an offset market that sealed the deal for TCT’s expansion. It created demand outside of Oregon, and, starting back in 2008, the organization began to actively invest in projects located beyond the state’s boundaries.

Now, the organization has invested in over 40 projects and delivered more than two million tonnes of emissions reductions. A number of these projects have introduced new methodologies into the marketplace, including a wetlands methodology in the US Gulf Coast and biochar methodology now recognized by the American Carbon Registry (ACR).

However, the trust doesn’t work on the ground on these projects. Rather, the organization enters into a contract with the project developer and provides upfront, early stage, or pay on delivery financing. That early-stage financing carries a risk – especially with untested methodologies – but the organization’s 15 years of experience has come in handy in picking successful projects.

So far, TCT has a 3.9% default rate for all of its Oregon program contractual commitments. In these cases, a “default” was defined as instances where the upfront funding provided wasn’t recouped in cash paid back and/or offsets supplied. The Blue Heron Energy Efficiency Project is one of six such projects, with TCT providing $500,000 in upfront financing and receiving only 70% of the contracted offsets once the mill filed for bankruptcy.

Seeing the Grasslands for the Ducks

TCT’s latest collaboration typifies recent projects as it involves a new methodology and collaboration across organizations. In this case, TCT partnered with Ducks Unlimited, Bonneville Environmental Foundation and Chevrolet.

Ducks Unlimited, the non-profit organization dedicated to preserving waterfowl and their habitat, had dabbled in carbon finance in the early 2000s. But it wasn’t until 2008 that the organization really started looking into scaling up its Prairie Pothole Avoided Conversion of Grasslands and Shrublands project. Officials engaged with local livestock landowners to increase the area of the project and then looked into developing a protocol.

Partnering with TCT made sense, said Billy Gascoigne, Economist/Environmental Markets Specialist at Ducks Unlimited, because the organization was waddling into unfamiliar territory. Ducks Unlimited’s primary expertise is, well, ducks. Not carbon pricing or marketing. And the organization made too much of a substantial investment into the project for it to fail because the offsets couldn’t be sold.

TCT knew how to work with a project from start to finish. The finish was especially important for the voluntary market, given that project developers often need to do a lot of legwork to find a buyer. Those were key components, Gascoigne said, especially since The Climate Trust knew how to market offsets and talk with the registries.

The connection was made through Dick Kempka, Vice-President of Business Development at TCT, who previously worked at Ducks Unlimited. He believed in the project’s potential to scale up, and its marketability for corporate buyers. Kempka’s belief in the project paid off when nearby Bonneville Environmental Foundation approached with an interest in securing offsets on behalf of Chevrolet.

Chevrolet didn’t provide money upfront, but the early expression of interest helped Ducks Unlimited with other financing. The methodology still took three more years before it was approved by ACR.

Officials at the automotive company weren’t surprised by the length of time required. Though primarily a buyer, Chevrolet had also ventured into methodology development with its Campus Clean Energy Campaign (spawning the similarly named Verified Carbon Standard-approved Campus Clean Energy and Energy Efficiency methodology), which took two years to gain approval. David Tulauskas, director of sustainability for General Motors, Chevrolet’s parent company, said the automaker prefers to buy from first-of-its-kind projects and those with an impact on local communities – boxes that the Ducks Unlimited project checked.

The Next Frontier: Green Bonds

Despite the success of this and other new projects, Kempka said, “I think we’ve transitioned our philosophy where it’s not as likely we would get as involved with this early-stage methodology development anymore.”

The organization wants to lessen its vulnerability to boom-and-bust financing cycles. When Executive Director Sean Penrith joined back in 2013, he was tasked with determining a new path for The Climate Trust. After two years of introspection, he decided that TCT had three exceptional skills: scoping investable projects, stewarding projects to completion, and commercializing projects.

“In short, I realized that we are very good carbon fund managers,” he said. So instead of investing in new projects as usual, Penrith has his eye on funding something more novel: green bonds.

With $25 million ready to invest, The Climate Trust would be able to attract investors to create a larger pool of money. The organization would then channel the proceeds into the forestry, grassland conversion and other landscape carbon offset projects that TCT excels at via bonds, which typically last for 5-10 years. The organization would sell carbon offsets into the compliance and voluntary carbon markets and thus repay its purchasers.

The Climate Trust is now actively exploring the possibility of a green bond as Penrith believes that the timing is ideal. Bond rates are low, and green bonds are predicted to balloon to $100 billion this year (compared to $35 billion last year, according to Bonds and Climate Change: The State of the Market in 2014). Existing green bonds are typically oversubscribed and sell out within a few hours.

“The reason we ended up with a climate bond is we see it as a large, fairly untapped reservoir of willing and interested capital,” Penrith said. “It’s an amazing intersection between the environment and institutional capital demand. It’s low interest, and it’s pretty timely given the current bond market rates.”

For next steps, the organization plans to use 2015 as a pilot year. TCT plans to invest some of its own capital in addition to partners’ capital, with the hope of demonstrating a successful proof of concept.

“If that’s successful, we would look at tripling or quadrupling that size in the subsequent year and thereon. We want to get to the point where we’re managing issuances of $250 million per issuance.” Penrith said.

“We’re really taking a bet – we are not cavalier, very prudent, but what we’re saying is that the currency of carbon is going to increase in its value, it’s going to become increasingly common, widespread, used, managed, monitored and exchanged. We really believe that in the next five years, the time for carbon currency has come.”