HOW’S THE CARBON OFFSET BUSINESS? GOLDMAN SACHS BUYS IN

Surely this is one of the most unqualified endorsements of the future of the emissions offsetting business so far made in the U.S.

With a run on its holdings that drained a third of its deposits just a week ago, Goldman Sachs has no cash to expend frivolously yet it bought a 10% share of Blue Source LLC, a dealer in one of the newest and most uncertain kinds of financial businesses, the selling of voluntary “carbon” offsets.

Why would Goldman Sachs spend money on a company that deals in something so speculative as emissions credits? Because with the market down it can buy in cheap right now. For its money, Goldman Sachs gets a piece of a business expected to double in size when voluntary emissions credits become mandatory.

That Goldman Sachs would expend limited liquidity on such an investment is yet another indication of how likely a mandatory cap-and-trade system is. The current meltdown may have delayed its arrival, but cap-and-trade is coming.

The Emissions Trading Scheme (ETS), the European Union’s mandatory cap-and-trade system, has been in operation since 2005. There were problems early on but the market has stabilized in the last 24 months. The recent financial crisis has slowed activity and brought the price of emissions down but there is no indication the system cannot handle the turmoil.

The Regional Greenhouse Gas Initiative (RGGI) involving New England states in a mandatory cap-and-trade system kicked off in September. The Western Climate Initiative (WCI) is making its way through state legislatures.

Proposals for a national cap-and-trade system are scheduled for consideration by the next U.S. Congress. Both presidential candidates have endorsed the concept of a national system as the most effective way to put the power of the markets to work to price emissions and fight global climate change.

Even if the current financial turmoil leaves political leaders in doubt about the wisdom of adding an extra cost into the economy right now, it is widely thought to be only a matter of time until such a program is instituted.

Goldman Sachs apparently either believes the implementation of a mandatory emissions-capping system will not be delayed or believes the price of companies like Blue Source will rise soon in anticipation of that eventuality.

Footnote: Blue Source lists carbon-capture-and-sequestration (CCS) as one of its offset projects. This is instructive. Any cap-and-trade system must NOT allow credits for "clean" coal unless it can be proven clean (which is unlikely to happen in the foreseeable future).

click to enlarge

Goldman Buys Minority Stake in Carbon-Offset Company
Nicholas Larkin and Jim Efstathiou Jr., October 27, 2008 (Bloomberg News)

WHO
Goldman Sachs Group Inc. (Leslie Biddle, head of commodity sales); Blue Source LLC (Bill Townsend, CEO); The Regional Greenhouse Gas Initiative (RGGI); The Western Climate Initiative (WCI)

WHAT
Goldman Sachs expended precious capital on the purchase of a piece of Blue Source, a company that deals in emissions-offsets.

One of the unfortunate attractions of the "clean" coal myth is as an "offset." This needs revision. (click to enlarge)

WHEN
- The RGGI held the U.S. first emissions credits auction in September 2008 and will have follow-up auctions in December 2008 and March 2009
- The WCI launched in February 2007 and is making its way through state and provincial legislatures.
- A national cap-and-trade system is expected to come before the U.S. Congress soon after the next administration is open for business - but whether it will be viable in the current economy is debatable.

WHERE
- Blue Source LLC is based in Salt Lake City, Utah.
- The RGGI participants: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont.
- The WCI participants: Arizona, British Columbia, California, Manitoba, Montana, New Mexico, Ontario, Oregon, Quebec, Utah, Washington.

WHY
- Goldman bought an equity stake in Blue Source of less than 10%.
- The partnership brings Goldman's liquidity and a customer list of thousands to Blue Source.
- Blue Source presently handles credits offsetting ~20 million tons of emissions annually. Demand is expected to double as mandatory emissions limits become more likely.
- Voluntary emissions credits are purchased by companies that take it as their responsibility to offset emissions, and especially by companies that want to have the public image of a “green” or “socially responsible” company.
- Credits from projects that destroy methane from landfills or that bury carbon dioxide underground are worth about $10 a ton, less than half the cost of credits in the European Union greenhouse-gas market.

click to enlarge

QUOTES
- Bill Townsend, CEO, Blue Source: “We have a customer list of 100-plus clients…They have a customer list of thousands. A company the size of Goldman is hunting for a really big supply.''
- Leslie Biddle, head of commodity sales, Goldman Sachs: “Interest in the pre-compliance carbon market in the U.S. is growing rapidly and we are excited to be able to offer our clients immediate access to a diverse selection of emission reductions to manage their carbon risk…''