Can Carbon Credits Slow Global Warming?

By: Anya KamenetzMon Jun 23, 2008 at 4:35 PM

Legal limits on greenhouse-gas emissions are coming fast, with a $1 trillion carbon market emerging. At the core: A cadre of young, idealistic Yale forestry grads. But will carbon offsets do anything to slow global warming?

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Camile Rebelo | Photograph by Amy Eckert

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John Forgach | Photograph by Amy Eckert

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In the speculative frenzy of a market like this, just as with the dotcom boom 10 years ago, the paradox is that the leading experts tend to be kids in their twenties fresh out of grad school. While Michigan's and Duke's programs are players too, Yale grads are at the top of that list. "When I go to these carbon conferences, if eight names are mentioned, maybe six of them are joint degree or FES," says Radha Kuppalli, a 30-year-old Yale FES grad with an MBA. Kuppalli's career stretches back about as far as the carbon market itself. Just out of college in 2002, she worked at Natsource, where she helped write the World Bank's official annual report on the carbon market. "Back then, it was small enough that you could follow every single trade," she says. Now, she tells me with a wide, excited grin, "we're really market leading -- we're making this stuff up as we go along."

The idea of carbon credits can be traced through a single corporation, AES, one of the world's largest power companies. Back in the late 1980s, AES began planting trees and preserving existing forests in Central America, and calculating the CO2 that would be absorbed from the air as a result. "We did those as social-responsibility projects," says Bill Lyons, now president of AES's Climate Solutions Business, "before Kyoto was a twinkle in anybody's eye." By last year, the company had entered into a partnership with GE to bring the largest single portfolio of carbon credits to market: 10 million tons, expected to grow to 34 million by 2012. The credits come from offset projects around the world, including trapping methane from animal waste, landfill gas, and palm-oil mill effluent; lighting efficiency (in India); and coal-mine ventilation (in Africa and Asia). "We view this as a long-term business," Lyons says.

How does a lagoon of cow manure become a ton of internationally tradable carbon? Through a combination of experimental finance and experimental project development -- all dreamed up and implemented by supersmart, often Yale-trained, ecologists. Rebelo, for example, works as an independent consultant for power and timber companies. Her clients are buying or planting huge tracts of trees, calculating the amount of carbon they absorb from the atmosphere each year, and then certifying that "removed" carbon as credits, one ton at a time. "My role is the carbon," she says. "I do all the baseline studies, put the methodology together, and do the monitoring and documentation required for certification."

The trickiest part comes in the third-party verification, to which all such projects must submit. In setting the "baseline," Rebelo must prove that the tree she's "saving" would otherwise be cut down. She must also somehow ensure that saving one tree won't lead to two trees being cut down somewhere else and that a tree she is saving one year won't burn down the next. Such assumptions suggest why some observers distrust the offset concept altogether: There's a lot of room to fudge.

Yale forestry grads didn't go from counting Ponderosa pines to pricing risk overnight. They needed shrewd businesspeople to open their eyes to the larger opportunity -- people such as John Forgach. A Brazilian millionaire with a courtly manner, Forgach spent three years teaching at FES, just as the international carbon market was heating up, and his classes, especially a business-plan class he taught with the former head of private equity at JPMorgan, were oversubscribed. He was considered a "bit of an itinerant preacher," as one of his former students puts it, whose sermons focused on the glories to be won by combining environmental expertise with financial acumen. And through his connections in international finance, industry, government, and academia (he has also taught at the London School of Economics and Madrid's Instituto de Empresa), Forgach helped get a few dozen students, including Kuppalli, jobs or internships. The FES and joint-degree MBA grads who sat in his classes are now in Argentina, Brazil, Ecuador, Indonesia, Papua New Guinea, and South Africa, brokering carbon deals.

Forgach traded oil before he traded trees. In fact, he made millions selling oil and petro-products all over West Africa, so it should come as no surprise that his interest in carbon is more than ecological. Still, he has abundant charisma and enough lefty patter to win over most Yalies. (Full disclosure: I too graduated from Yale, but not the FES.) "I was a philosophy student in Paris in '68, on the barricades," he tells me over lunch at an Indian restaurant. "Then I went to Harvard for my BA; we invaded the administration building and set on fire a few other things." Unlike most counterculture heroes, Forgach studied finance with John Kenneth Galbraith and government with Henry Kissinger, and moved on to a post in commodities trading with the famously Clinton-pardoned Mark Rich, leaving before there were any indictments. "I come from a very old European family," he says. "They paid for my education, but my fortune I made myself under the old moral standards -- meaning, you take the most advantage of all the hanky-panky in business and government."