Carbon Swaps = Big Bucks

April 25, 2009

April 25, 2009

Salt Lake City, UT (The Salt Lake Tribune) – Bill Townsend is a brainy, easy-speaking former Louisianan and oilman who founded a couple of companies and spent 16 years in the energy business before migrating to Utah about 20 years ago.

Partner Greg Spencer grew up in the Midwest and came to Salt Lake City in the 1970s to study geography and to ski. He eventually became a lawyer, working for American Stores. In 1999, he helped sell the Salt Lake City-based grocery chain to rival Albertsons Inc. in an $8.7 billion deal. The two are evangelical Christians who met at a Bible study class just a stone’s throw from where the carbon trading company they later founded is located, in the Cottonwood Corporate Center in Holladay.

Townsend, 55, and Spencer, 52, are self-styled environmental capitalists. Others have called them Christian capitalists and carbon entrepreneurs. Whatever they’re called, their company, Blue Source LLC, is at the vortex of a growing, but controversial, voluntary carbon emissions offset sector advocated by strategies that serve as one of the cornerstones of the Obama administration’s energy policy.

Proponents, such as Townsend and Spencer, claim carbon trading has the potential to cleanse millions of cubic tons of greenhouse gases from the atmosphere, while providing a bridge from a carbon-based economy to a future where energy comes from hydrogen fuel cells, solar, wind or some other technology yet to be discovered.

Critics contend that carbon trading simply pushes pollution from one place to another, and that although strides have been made, the market-based technique for controlling global warming hasn’t lived up to promises.

“The way we would judge the voluntary program is whether it has successfully reduced emissions to a level where the problem is going away or under control. The voluntary approach has not succeeded in doing that,” said John Coequyt, senior Washington representative for The Sierra Club.

Market emerges » A carbon market has emerged in the United States, even though Congress has not enacted caps on emissions of carbon dioxide and other greenhouse gas emissions. Polluting companies buy offset credits, a financial derivative generated from emissions reduction, principally to get ahead of regulations they expect Congress will eventually impose. Globally, the market for trading emissions reductions is expected to reach close to $670 billion in 2013, according to SBI Reports, a market research firm. The U.S. market could be about $100 billion.

An energy bill introduced last month by Democrats Henry Waxman of California and Edward Markey of Massachusetts, could spur domestic carbon trading further. It would establish a market-based program to reduce global warming pollution, possibly modeled on the strategy Blue Source developed.

The Waxman-Markey bill has pushed the intensely private Townsend and Spencer into the limelight. Representatives from several states have contacted the pair, hoping to learn from their experience. Since 2001, Blue Source has amassed 300 million metric tons of greenhouse gas emission offsets, said to be the country’s largest collection of credits that can be bought and sold with the aim of reducing global warming.

The company has projects in 45 states and three Canadian provinces, including efforts to capture methane from landfills and bury carbon dioxide from coal-fired power plants. In Colorado, Bluesource developed a project to pipe carbon dioxide from a natural gas processing plant in Colorado to a line that, in turn, pumps it into an aging oil field in Texas. Blue Source expects the CO2 reduction to be equivalent to taking 70,000 cars off the road.

“So many times when we would visit with CEOs and chief financial officers, there was a cultural mind-set in this country that you could not do something that was good for the environment and good for the bottom line at the same time. The concepts were mutually exclusive,” Spencer said. “I think the carbon economy is proving the opposite to be true, that it is possible to do something for the environment and your bottom line at the same time.”

Foresight » Bluesource traces its history to a predecessor company, Petro Source Carbon Co., a crude oil blending company that Townsend joined in the mid-1980s. In 1995, he took over the company’s carbon dioxide division. One of his projects was an 82-mile pipeline to carry carbon dioxide captured from five natural gas processing plants to a west Texas facility. There the CO2 was injected into mature oil fields to sweep more crude toward otherwise depleted wells. The experience gave Townsend an insight. A carbon offset market was developing in North America, spurred by growing certainty that greenhouse gas emissions eventually would be regulated. With that in mind, Petro Source approached Ontario Power Generating Inc., a Canadian utility that produces electricity with coal-fired plants. After a year, Ontario Power agreed to buy 1 million tons of offsets from the west Texas project.

Townsend was living in Salt Lake City. Upon meeting Spencer at the Bible study class, the pair began a friendship that led to discussions about personal values and whether their shared passion for the environment could lead to a business. They launched Bluesource in 2001. “We just believed back in 2000 (when, with no more than a pencil and a piece of paper to map out their faith-based strategy) the market would come. “It had to,” Spencer said.

One of their biggest coups came a year later. Ontario Power, one of the biggest emitters of carbon dioxide in Canada, knew Bluesource was buying large volumes of carbon credits from CO2 producers that had developed methods of cutting their gas emissions, Spencer said.

Ontario Power struck a five-year deal with Bluesource, agreeing to buy credits worth 9 million tons of carbon dioxide. The agreement allowed Ontario Power to meet its voluntary commitment to reduce greenhouse gas emissions without building expensive stack scrubbers.

The transaction was “the largest publicly announced firm purchase of ‘carbon dioxide equivalent’ in the history of the global greenhouse gas market,” according to, which helped arrange the deal.

Since then, Bluesource has clinched contracts with clients in several industries, including grocery giant Albertsons, Tyson Foods, trucking company J.B. Hunt Transport Services and Peabody Energy Corp., the world’s biggest coal producer. “We had an inkling that the concepts we were doing were highly transferable — emissions trading, identifying certain industries that would have a role in the future, structuring transactions in a certain way,” Townsend said.

Landfills » Lately, Bluesource has been signing contracts with landfill operators and has arrangements with six too small to be regulated by the Environmental Protection Agency. At two landfills, in Nebraska and Maryland, Bluesource has built systems to capture and burn off methane, a greenhouse gas with 21 times the global warming potential of carbon dioxide. Capture systems at the other landfills belong to the owners. “Then we create the carbon credits that are associated with the capture system,” said Annika Colston, a Blue Source vice president. “They are highly marketable.”

Money to finance Bluesource has been rolling in. In 2006, First Reserve Corp., a private-equity investor, bought a 50 percent stake in the company. As credit markets began to freeze, Och-Ziff Capital Management Group agreed in August to provide up to $500 million for new greenhouse gas-reduction projects. It also purchased a piece of Blue Source. And in November investment bank Goldman Sachs acquired an equity stake, while also promising to market Bluesource offset credits to its clients.

“We have a long tradition of working with our clients to help them hedge risks associated with various commodities,” said Goldman Sachs spokesman Michael DuVally.

“As European, and now U.S. regulators, adopt regulations addressing climate change and creating markets for carbon, we are developing new products to add this new commodity risk to our clients. This alliance with Blue Source is one of the key components of our carbon strategy in the United States,” DuVally said.

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