The transportation sector accounts for a large — and growing — proportion of global warming emissions around the world. As a result, major oil companies face a large — and growing — problem with their products. While a hydrogen economy might prove a long-term solution, oil companies are beginning to ask themselves what can be done in the short-term? BP and the Swiss Oil Association think they have an answer: offsets. The Ecosystem Marketplace looks into whether or not they are right.
The transportation sector accounts for a large — and growing — proportion of global warming emissions around the world. As a result, major oil companies face a large — and growing — problem with their products. While a hydrogen economy might prove a long-term solution, oil companies are beginning to ask themselves what can be done in the short-term? BP and the Swiss Oil Association think they have an answer: offsets. The Ecosystem Marketplace looks into whether or not they are right. The recognition that rendering offal can help prevent climate change is just one of the many strange, but innovative ideas behind energy giant BP's Global Choice program. In 2001, BP invested in a meat rendering plant outside Sydney, not because it needed the protein meal, but because it wanted to help the plant avoid some 8,200 metric tons of annual greenhouse gas emissions (GHG) by switching from coal to gas. As part of its Global Choice program, BP offers its commercial customers the opportunity to offset some of their GHG emissions either by paying more for an Ultimate grade gasoline that comes with a company promise to offset the emissions generated by its use, or by partnering to purchase offsets outright. So, for example, Queensland Rail passengers now find that, thanks to an oil company, the emissions racked up by their train ride are offset by reductions at an industrial meat plant many miles away. This complicated scenario is just one example of a growing global push for greener solutions to modern transportation needs. According to the International Energy Agency, cars, trucks and other forms of transportation spewed 21% of the world's carbon dioxide emissions in 2002. Since oil companies have a lot to lose from legislative efforts to curb these emissions, some of them have begun looking for ways to buy themselves time through innovative programs aimed at offsetting the global warming damage caused by their products. The Swiss Oil Association says it hopes to collect $58 million to invest in offset projects. And in Australia, BP has already neutralized more than 800,000 metric tons of GHG emissions from its Ultimate grade gasoline customers. "We do it because we fundamentally believe that we need to tackle climate change, whether it be from our own operations or customers using our products," says Kerryn Schrank, business advisor for future fuels at BP. "Offsets are going to be important for the transport sector for the next 20 years or so, until we can get cleaner transport options."
Down under on top
The roots of Australia's climate friendly fuel can be traced to the vision of BP's leader, the passion of a regional executive, and a timely visit from a bank. At the turn of the century, Lord John Browne, BP's CEO, decided to take a different tack than his oil industry peers, becoming the first to publicly acknowledge the dangers of global warming and how his company's product might, in part, be responsible. As part of a broader campaign to transition BP "beyond petroleum," Browne launched a company-wide clean fuels program. Mike McGuinness — BP's vice president for fuels management in Australia — had been waiting 17 years for just such an opportunity. "I think that most people in the oil industry are actually very, very green and want to do the right thing, it's just how can you do that?" he recalls. "Until I got involved with clean fuels I couldn't see how I could make a difference." Serendipitously, the Commonwealth Bank of Australia paid BP a visit touting opportunities for GHG offsets. So McGuinness began exploring the idea of making BP's new Ultimate grade of gasoline carbon-neutral as well as sulphur-free. "We said 'Let's have a product available that is a carbon-neutral fuel,'" McGuinness remembers. "But there was no real framework to do that." In fact, it had never been done before. With the blessing of his superiors and the help of his co-workers and bank partner, McGuinness set about designing the first offset program for gasoline. "We were conscious of the fact that consumers were skeptical of anything offered by an oil company supported by a bank so we had to make it simple and transparent," he says. Accordingly, the company partnered with the Australian government and the international consultancy, Det Norske Veritas (DNV). "We came to the conclusion that we needed third party verification," says Simon Mathis, industry head for environmental initiatives at Commonwealth Bank of Australia and one of McGuinness's partners in shaping the Ultimate program. "We approached the federal government to give them the opportunity to back our idea which they very quickly did." Thus was born the Australian Greenhouse Office's Greenhouse Friendly program. Working with the bank, oil company and consultants, the AGO developed a set of rules for offset projects. First, they must be in Australia, no international trading allowed. Second, they must be additional, i.e. they would not have happened without the extra income provided by the sale of GHG credits. And third, the GHG credits must offset the full lifecycle of the oil product, from extraction to transportation to use. Now, all BP had to do was meet those criteria. BP staff determined the lifecycle emissions associated with their BP Ultimate product on a kilograms per liter basis and then set out to offset those emissions by investing in fuel switching and methane capture, among other projects. "It became very obvious that the reduction of methane was by far and away the cheapest and most accessible source of emission reductions," Mathis says.
No easy trick
In November 2001, offsets began for all emissions associated with BP Ultimate — the world's first climate friendly fuel. It was not an immediate success. "Very few people had heard of the program and even if they had, they didn't understand it," Schrank recalls. "We were spending a lot of money purchasing offsets for a customer base who had no idea we were doing it for them." Based on the program's slow start, BP scaled back its climate friendly fuels offer the following year, no longer providing it to every customer who purchased BP Ultimate gasoline. Instead, BP began offering the product exclusively to commercial users of its fuel credit cards. "The issue about any offset program is that people get it, but you've really got to explain it. It was going to be quite difficult to explain that to all of our hundreds of customers while it was easier to explain it to the CEO of a big mining company or a big transport company," BP's McGuinness says. This retrenchment saved the program and BP now boasts more than 6,500 commercial card customers who have collectively offset more than 819,000 metric tons of GHG emissions. In addition, 16 corporate customers — including Queensland Rail — have partnered directly with BP to purchase more than 300,000 metric tons of GHG reductions. The company also offsets 100% of its own staff's transport emissions. Nevertheless, it has been an uphill struggle at times. "For a company, it's quite cheap per vehicle but for bigger companies that have lots of vehicles, all of a sudden it becomes a bigger cost," Schrank says. "Trying to get companies to pay more for what is at the end of the day a voluntary program is a challenge." The main problem seems to be that Australia, like the US, lacks a mandatory GHG emissions reduction scheme or targets. So Schrank has been charged with exploring the potential to expand the program into other countries that perhaps do have such goals. "Germany, the United Kingdom, Spain, the governments in those countries are deciding to be more proactive on climate change," she says. "Is there scope to do other things? And would a government support an offset program?"
BP is not alone in looking to broaden its horizons when it comes to clean-fuels. Other oil companies, too, are developing their own offset-based approach. In April, a consortium of Swiss oil importers — the Swiss Oil Association — won approval for a voluntary deal with the Swiss government. Under its terms, the oil importers would contribute between 1 and 1.6 rappen — the Swiss penny — for every liter of gasoline and diesel sold. The donated funds — at least CHF 70 ($58) million per year — will be invested by a private foundation in energy efficiency measures and other projects, both in Switzerland and abroad, that will reduce GHG emissions. The Swiss deal was driven less by altruistic global warming beliefs than it was by the threat of a new gas tax at home. The Swiss have pledged to reduce their GHG emissions by 8% below 1990 levels over the period between 2008 and 2012 under the terms of the Kyoto Protocol. In line with this goal, the country passed a CO2 Act in 2000 mandating that CO2 fossil fuel emissions be reduced by 10% below 1990 levels. By 2002, however, CO2 emissions from fossil fuels burned on the road had actually risen 7% above 1990 levels. "This represents a potential compliance gap with respect to the 2010 target in the Swiss CO2 Act of nearly 15%, which is likely to increase further," writes Anne Arquit Niederberger, an independent consultant at Policy Solutions, in a paper analyzing the problem and its potential solutions. "Road transport emissions from gasoline and diesel are responsible for 97% of total transport sector CO2 emissions." The Kyoto-inspired law thus poses a major problem for Swiss oil importers, since their product accounts for the bulk of CO2 emissions from the transport sector. If Swiss oil companies fail to curb the country's fossil fuel emissions problem, the Swiss government has threatened to impose a mandatory CO2 tax on the use of their products, not unlike the tax recently imposed on the use of heating oil in an attempt to curb its use. With the clock ticking, Niederberger offered a solution: the climate penny. Under the terms of her idea, Swiss oil importers would voluntarily contribute roughly one penny (or rappen) for every liter of fuel they sold. The money would be collected by a private foundation and then invested in offset projects domestically and abroad. "The climate penny is — not only in our view — a better solution than the CO2 tax," says Rolf Hartl, managing director of the Swiss Oil Association. "In the past, we were often approached by people who suggested some kind of voluntary penny for different purposes. When the flexible mechanisms [of the Kyoto Protocol, like the CDM] got momentum on the international level we saw immediately that the Swiss CO2 law provided no tools for financing these mechanisms. On the other hand, the law encourages voluntary measures. So we identified this new field of action." The precise details of the climate penny still must be worked out, but an agreement should be in place by July or August says Michael Kaufmann, Vice Director at the Swiss Federal Office of Energy. Kaufmann hopes that up to 50% of the money would go to improving the energy efficiency of Swiss buildings, 20% to improve the fuel efficiency and emissions profile of Swiss vehicles and only the remaining 30% be devoted to emission offsets purchased in foreign countries under the flexible mechanisms of the Kyoto Protocol. Hartl agrees, to a point, preferring to emphasize that his group hopes to invest in "all measures that are cost-effective, domestically and abroad." The climate penny program will only have a short window to prove itself. A progress report on its success is due in 2007 (though the Swiss Oil Association hopes to extend this deadline) and a subsequent decision about the program's fate will be made soon after that. "After two years it will be decided if it gets a further chance or will be replaced by a CO2 tax," Kaufmann says. "It depends on the real effects of the climate penny measures." "I think that's very important because there could be a free rider problem," Niederberger says. "But because there's the threat of a CO2 tax, there's a pretty strong pressure [on fuel sellers] to make it work."
The Swiss Oil Association and BP are taking the first steps on a long journey to make transportation fuels more climate friendly. "The ultimate future for fuel is not to emit carbon dioxide at all," McGuinness says. "That's why hydrogen is so attractive. It's really about how you get from here to there." But the oil companies need a partner in this effort: the consumer. No matter what kinds of programs are put in place, no matter what innovations are offered, no climate friendly fuel can succeed until consumers understand the impact of their own transportation and fuel choices. "At the end of day, it's about customers," Schrank says. "If the customers aren't willing to buy into it and accept responsibility for the emissions they generate, then there's no point for us in offering it." David Biello is US Editor for Environmental Finance magazine and a freelance writer based in Brooklyn. He can be reached at email@example.com.
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