Author: Phillip Ludvigsen

Carbon markets will only deliver environmental benefits if people can be sure that a ton of emissions offset equals or exceeds a ton of emissions reduced. That's why third-party validation is a cornerstone of existing markets around the world. Proposed US legislation, however, is almost mum on the issue.



23 August 2009 | There is an old saying – "You can't manage what you don't measure." With the advent of the near global meltdown of the financial markets, there is a new addition to this adage:

"If you don't independently verify what you measure – especially when money is involved – don't bother."

This new reality will undoubtedly dictate the course of future carbon markets
and its ability to reduce greenhouse gas emissions will certainly hinge on the ability of disinterested third parties to evaluate the effectiveness of offset programs recognized under cap-and-trade measures embedded in the Waxman-Markey Bill (HR2454), which is being reviewed by the Senate and due for vote in September.

Verification Gets Short Shrift

It is interesting to note that the word "verification" is found just 55 times in the current version of Waxman-Markey – officially known as HR2454. This is less than one would expect, given that the legislation is almost 1500 pages and may result in the world's largest capital market (over a trillion dollars). Nonetheless, the concept of independent and accredited third-party verifiers appears to be controversial.

Early versions of the Bill did not require this type of verification, but relied on the US Environmental Protection Agency (EPA) and other agencies for review. Given the specialized nature, independence, and documented "real-life" expertise required by accepted international standards, government agencies would be hard pressed to pull off the expected high level of assurance demanded by today's investors.

In addition, this vast government infrastructure would need to be in place within 24 months or less!

An Ounce of Prevention

Deficit hawks argue that third-party verification costs too much, but that argument rings hollow in these days of trillion-dollar stimulus efforts.

Indeed, we could have saved billions of taxpayer dollars if effective independent review (and a little common sense) had been imposed on the financial community over the past decade. These days, it is difficult to envision any senator arguing for less regulation in a new financial market.

Contrary to the common perception that Waxman-Markey is focused solely on cap-and-trade, the bill addresses much more. As its full name – the "American Clean Energy and Security Bill" – implies, it creates a framework within which greenhouse gas emissions can be reduced at the most efficient cost.

Who's Minding the Mint?

To meet this monumental task, dozens of Federal and State government entities have been named to play some role in implementation (see Massive Undertaking, right).

Although many of these agencies will have some role in oversight and review, the current version of HR2454 requires "verification" in three specific areas:


In general, the Department of Energy will be responsible for verifying various aspects of the Federal Renewable Energy Credits, carbon sequestration- and energy-efficiency claims. The US EPA and Department of Agriculture will take the lead overseeing third-party verification of carbon offsets. Various advisory committees, some involving multiple government groups, will be charged with selecting appropriate protocols and/or developing required methods for verifying energy savings and product efficiency claims.

More than Meets the Eye

Arthur O'Donnell, Executive Director of the Center for Resource Solutions (CRS), says that non-specialists often underestimate the complexity of verification, and he should know. His group oversees the Green-e certification program, which provides third-party verification of RECs.

"Currently, there are no third-party verification services for energy savings via efficiency in voluntary markets," he says. "Measurement and verification of energy efficiency savings in regulated utility programs is an evolving art, with the general trend moving from quantitative (number of audits/lighting installed) to qualitative (actual savings measured) and paying utilities based on performance."

The bill doesn't specifically mention verification of companies' greenhouse gas (GHG) inventories, but section 713 does mandate the use of an established GHG registry to track regulated entities. If one looks at the requirements for this registry (i.e., "… jointly established and managed by more than 40 States and Indian tribes in 2007"), The Climate Registry is the only one that fits.

Broad Reach

Because third-party verification is a fundamental tenant of The Climate Registry's methods and procedures, it is difficult to imagine reporting without the verification requirement. And, because HR2454's reporting thresholds are in some cases very broad, tens of thousands of companies may have to report their GHG inventories.

For example, under Section 713, any reporting entity with a vehicle fleet emitting over 25,000 tons of CO₂e annually would be subject to annual reporting and possible verification under a system similar to The Climate Registry. This reporting requirement would involve large delivery and rent-a-car entities, but may also include companies with large sales forces or on-site services such as insurance companies or even the Geek Squad.

Broadly interpreted, this threshold may include companies with other large mobile sources such as construction or excavation companies.

Rare Specificity

The one section of the proposed legislation that specifically refers to independent third-party verification is found in Title III - Reducing Global Warming Pollution under the Verification of Carbon Projects (GHG offsets).

The Secretary of Agriculture will be responsible for establishing rules requiring third-party verification for agriculture-related credits, while the EPA Administrator will oversee verification by validators accredited under ANSI (American National Standards Institute).

In addition, any early action offset credits (those initiated prior to the Bill's Enactment but eligible for credit nonetheless) must be verified by a State or Tribal Regulatory Agency or an accredited third-party independent Verification Body such as an existing ANSI accredited GHG verifier.

"The role of conformity assessment is absolutely crucial in providing confidence and consistency in this rapidly-evolving market," said Reinaldo Figueiredo, Senior Director of Accreditation Services at ANSI. "Increasingly, consumers and the public are weary of emission reduction and associated environmental claims. Clear rules, procedures and methodologies for reporting and verifying assertions must be put into place to compensate for the inherent uncertainty associated with these claims."

Recognizing the Need

This need for assurance is echoed by John C. Shideler, Ph.D, GHG manager at NSF-ISR (an accredited GHG verifier)

"Waxman-Markey establishes a high bar for offset credits," he concedes. "Provision in the legislation will ensure that offset credits are only issued for projects that have demonstrated environmental integrity, are permanent, and conservatively accounted for and mitigate any potential leakage."

Most would agree that GHG verification by an accredited third-party is valuable – but at what cost? Because GHG inventories and projects can vary in scope and complexity, there are no simple methods for calculating the cost of a quality verification effort.

In general, good documentation, diligent monitoring and attention to details prior to the audit tend to reduce verification costs – but they will never be eliminated.

Verification is an inherent part of building a reliable marketplace. As Nobel Laureate George Akerlof showed in his 1970 paper "The Market for Lemons: Quality Uncertainty and the Market Mechanism", consumers of any product will tend to treat everything on offer as a lemon if there's no easy way to differentiate between the good and the bad. Skimping early on the critical task of rigorous validation might save a few pennies now, but it would probably cost us many times that amount if it ends up costing the market its credibility.





Dr. Ludvigsen is currently President of Carbon Credit Consulting, LLC, specializing in Greenhouse Gas (GHG) verification and consulting services. He is a Certified GHG verifier (CSA America Cert# 0020A), International Standards Organization (ISO 14064) instructor and course developer for the Canadian Standards Association (CSA), and serves as an accreditation assessor for ANSI. Dr. Ludvigsen has a Ph.D. in Civil and Environmental Engineering, MBA in Finance and is Six Sigma Black Belt trained in process improvement. Dr. Ludvigsen will be joining KPMG Canada this Fall as Director, Carbon Advisory within their Global Sustainability Services practice.

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