purchasing in an unregulated market: federal government procurement of carbon offsets

PURCHASING IN AN UNREGULATED MARKET: FEDERAL GOVERNMENT PROCUREMENT OFCARBON OFFSETSAuthor(s): Katie TaylorSource: Public Contract Law Journal, Vol. 39, No. 1 (Fall 2009), pp. 141-160Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/25755755 .

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PURCHASING IN AN UNREGULATED MARKET: FEDERAL GOVERNMENT PROCUREMENT OF CARBON OFFSETS

Katie Taylor

I. Introduction to the Carbon Offset Market. 142 II. Government Interest in Climate Change. 145

III. Government Purchasing in the Carbon Offset Market. 147 A. Lack of Competition. 147 B. Lack of Transparency. 150

1. Quality Assurance Mechanisms and Transparency. 150 2. Offset Value and Transparency. 152

C. Lack of Integrity. 154 IV. Issues to Consider When Formulating a Solution. 155

A. Ensuring Competition. 156 B. Ensuring Transparency. 157 C. Ensuring Integrity. 158

V. Conclusion. 160

In 2007, the U.S. House of Representatives purchased approximately $90,000 worth of carbon offsets through the Chicago Climate Exchange (CCX).1 The move was part of Speaker Nancy Pelosi's "Greening the Capital" initiative2 to make the House's offices carbon neutral within eighteen months.3

The purchase was intended to offset the carbon emitted from House operations after measures had been taken to maximize energy efficiency.4 As the House's chief administrative officer signed the deal with CCX, the decision was greeted

1. House Buys Carbon Credits Through Chicago Climate Exchange, Env't News Service, Nov. 12, 2007, http://www.ens-newswire.com/ens/nov2007/2007-ll-12-093.asp.

2. Id. 3. Press Release, Speaker Nancy Pelosi, Pelosi: As Part of "Green the Capitol" Initiative,

House to Reduce Energy Consumption by 50 Percent in Just 10 Years (June 21,2007), available at

http://speaker.house.gov/newsroom/pressreleases?id=0222. Making half of the Capitol complex carbon neutral would have an effect equivalent to eliminating the pollution from 17,200 cars. Id.

4. Id. The House has since decided to call off its plan to become carbon neutral, a move that

will be discussed further in Part IV. See David A. Fahrenthold, House Is Abandoning Carbon Neutral

Plan, Wash. Post, Mar. 1, 2009, at A8.

Katie Taylor ([email protected]) expects to receive her Jf.D. degree from The George Washington University Law School in May 2010. She is a student member of the Public Contract Law Journal. She wishes to thank Karen Thornton, Christine Deconcini, Robert

Heilmayr, Derek Hanson, andNavah Sperofor their expertise, assistance, and support.

141



142 Public Contract Law Journal Vol. 39, No. 1 Fall 2009

with much fanfare and commentary on the importance of the House's commit ment to "energy efficiency and responsible stewardship of the environment."5

The House's actions highlight the increasing interest in environmental

protection and the ever-expanding presence of carbon offsets, both domesti

cally and internationally.6 The Federal Government's efforts to improve envi ronmental stewardship and achieve carbon neutrality are laudable, but there are difficulties associated with purchases in the carbon offset market that must

be addressed in procurement planning. This Note will evaluate the U.S. voluntary carbon offset market as it per

tains to federal procurement. First, the Note will describe the current volun

tary carbon market and its rapid growth, including government participation in the market. Next, it will lay out some of the major difficulties associated

with federal procurement in the carbon offset market, including lack of com

petition, lack of transparency, and lack of integrity. Finally, the Note will set forth particular solutions that would successfully address the major difficulties of government procurement in this market.

I. INTRODUCTION TO THE CARBON OFFSET MARKET

The creation of the carbon offset market has been an outgrowth of the

mounting international and domestic concern over climate change. Current science indicates that the rise in global temperatures is related to atmospheric levels of carbon dioxide and other greenhouse gases (GHGs).7 In order to

keep the global temperature from continuing to increase, the level of GHG emissions must be rapidly reduced.8 The reduction can be effected through reduced use of fossil fuels, improved energy efficiency, and the use of alterna tive energy.9 Individuals and companies are becoming increasingly involved in the carbon offset market in an effort to reverse climate change.10

A carbon offset is defined as "a measurable reduction of greenhouse gas emissions from an activity or project in one location that is used to com

pensate for emissions occurring elsewhere."11 While offsets are referred to as

5. House Buys Carbon Credits, supra note 1. 6. See Katherine Hamilton et al., Ecosystem Marketplace & New Carbon Fin., Forging

a Frontier: State of the Voluntary Carbon Markets 2008, at 5 (2008), available at http://eco systemmarketplace.com/documents/ pdf. The researchers tracked the trading of 65 million tons of carbon dioxide equivalent in 2007, at least double the amount traded in 2006. Id.

7. See, e.g., Intergovernmental Panel on Climate Change, Climate Change 2007: The Physical Science Basis 97 (Susan Solomon et al. eds., 2007), available at http://www.ipcc.ch/pdr7 assessment-report/ar4/wgl/ar4-wgl -chapter 1 .pdf.

8. See Anja Kollmuss et al., Making Sense of the Voluntary Carbon Market: A Com parison of Carbon Offset Standards v (2008), available at http://www.globalcarbonproject. org/global/pdf/WWF_2008_A comparison of c offset standards.pdf.

9. Id. 10. Id. 11. U.S. Gov't Accountability Office, GAO-08-1048, Carbon Offsets: The U.S. Vol

untary Market Is Growing, but Quality Assurance Poses Challenges for Market Par ticipants 1 (2008), available at http://www.gao.gov/new.items/d081048.pdf.



Federal Government Procurement of Carbon Offsets 143

"carbon offsets," there are six gases that are generally included in the concept of GHG reductions: carbon dioxide, methane, nitrous oxide, hydrofluorocar bons, perfluorocarbons, and sulfur hexafluoride.12 One carbon offset is cre

ated when an entity has reduced its emission of GHGs by one metric ton.13 Because GHGs do not remain localized in any particular area, reducing the

gases in one place can contribute to climate protection everywhere.14 Therefore, an individual who is concerned about the GHGs that may be emitted when he drives his car to and from work each day in Atlanta, Georgia, could purchase carbon offsets created in Portland, Oregon, to compensate for his own emis sions. In other words, carbon offsets are not geographically bound.

For an offset to be created, an entity must either fail to create or reduce

anticipated GHG emissions, or it must sequester GHGs.15 A failure to cre ate anticipated emissions occurs when an entity actually stops the release of GHGs that previously would have occurred, whereas a reduction of antici

pated emissions occurs where an entity continues to emit GHGs but lessens the amount emitted. For instance, one type of project that may generate off sets is the collection and/or destruction of methane.16 Methane is normally released into the atmosphere during coal mining.17 If an entity instead collects the methane and destroys it, then no methane has been released and an offset

may have been created.18 However, an entity's actions to eliminate or reduce

anticipated emissions do not automatically create a valid offset.19 Whether or not a valid offset has been created depends upon consideration

of four basic factors.20 First, an offset should be real, meaning that its exis tence can be verified.21 Second, an offset should be quantifiable, meaning that its existence can be measured.22 Third, an offset should be additional, mean

ing it was created by a project that decreased emissions below a "business as

usual" situation.23 Fourth, an offset should be permanent, meaning that emis sion is not simply being delayed until a later date.24 To the extent they relate to

transparency, these factors will be discussed in more detail in Part III.

12. W.at5nn.l-2. 13. See Chicago Climate Exchange ("CCX"), Overview and Frequently Asked Questions 9

(2007), http://www.chicagoclimatex.com/docs/offsets/General_Offsets_faq.pdf [hereinafter CCX Overview].

14. Kollmuss et al., supra note 8, at 1.

15. See Carbon Offsets, supra note 11, at 1. 16. See Chicago Climate Exchange, Coal Mine Methane Emission Offsets 1 (Sept. 2008),

http://www.chicagoclimatex.com/docs/offsets/CCX_Coal_Mine_Metliane_Offe 17. See id. at 2. 18. See id. Offsets also can be created through other types of projects, such as renewable en

ergy or carbon sequestration. See CCX Overview, supra note 13, at 4.

19. A reduction in methane release has definitely occurred, but whether that reduction con

stitutes an actual offset depends upon factors that will be addressed in subsequent sections of this

paper. 20. Carbon Offsets, supra note 11, at 2.

21. Mat 3. 22. Id. 23. Mat2-3. 24. Mat 3.




Offsets are generally sold in one of two types of carbon markets: the regula tory market and the voluntary market.25 Carbon offsets sold in the regulatory

market are utilized as part of a compliance scheme, such as a cap-and-trade system.26 The offsets addressed in this Note are those sold in the voluntary carbon market as part of the federal procurement system. Offsets traded in the voluntary carbon market are not currently part of an existing federal regu

latory or compliance scheme.27 The implications created by the lack of market

oversight will be further addressed in Part III. The most structured system for trading offsets in the United States is

through the Chicago Climate Exchange, which has created its own set of standards for offsets.28 Concerns over the credibility of offsets have led many private and public organizations to develop standards to help with determi nations of reliability.29 To this end, CCX maintains its own set of standards for GHG emissions reporting, verification, and compliance.30 Offsets that

meet the standards can be registered with CCX by either offset providers or offset aggregators.31 An offset provider is the actual owner of the offset

project, whereas an offset aggregator is an entity that acts as an administra tive representative for multiple offset projects.32 Once an offset is registered

with CCX, it can be purchased by an eligible purchaser, who can then sell it to an individual or company.33 In an effective offset transaction, the purchase of an offset becomes the final step of a carbon reduction process that began with a carbon-producing entity deciding to reduce its emissions. That entity has now received a payment that makes it financially possible and maybe even beneficial to reduce its emissions.34

25. See Kollmuss et al., supra note 8, at 4. 26. Id. 27. See id. at v. The American Clean Energy and Security Act, passed by the House of

Representatives in July 2009, would create a federal regulatory scheme for carbon offsets to be sold as part of a cap-and-trade system. However, regulation of offsets for cap-and-trade would not preclude the continued sale of offsets in the voluntary market. American Clean Energy and

Security Act of 2009, H.R. 2454, 111th Cong. ? 732(a) (2009). As of publication of this Note, the Senate had yet to vote on complementary legislation. Id. (as placed on the Senate Legislative Calendar under General Orders, July 7, 2009), available at http://frwebgate.access.gpo.gov/cgi bin/getdoc.cgi?dbname=senate_calendar&docid=sc007.pdf. The American Clean Energy and

Security Act will be addressed in more detail in Part II. 28. See Hamilton et al., supra note 6. The Chicago Climate Exchange ("CCX") is, in es

sence, a voluntary cap-and-trade program. Id. 29. See id. at 9. 30. Chicago Climate Exchange, Emissions Verification and Compliance, http://www.chica

goclimateexchange.com/content. jsf?id=524 (last visited Aug. 23, 2009) ("CCX is the only active standardized system in North America for requiring a rigorous level of greenhouse gas (GHG) emissions reporting, verification and compliance.").

31. Chicago Climate Exchange, Offset Project Registration, http://www.chicagoclimat.eex change.com/content.jsf?id=582 (last visited Aug. 23, 2009).

32. Id. 33. See CCX Overview, supra note 13, at 12. 34. Offsets sold through CCX may not be placed on the registry until the project has been

completed and verified. Thus, the project itself has been completed prior to the purchase of the offsets. Id. at 5.




II. GOVERNMENT INTEREST IN CLIMATE CHANGE

The growth of the carbon market coincides with increasing government interest in climate change. Between 2004 and 2007, the supply of domestic carbon offsets increased sixty-six percent.35 During that time and since, the Federal Government has taken a number of actions signaling an increased interest in climate change.

In January 2007, President Bush issued Executive Order 13,42 3, "Strength ening Federal Environmental, Energy, and Transportation Management."36

This order set out policy goals for federal agency conduct, including target dates for GHG emissions reductions.37 The order states, "[i]t is the policy of the United States that Federal agencies conduct their environmental, trans

portation, and energy-related activities under the law in support of their

respective missions in an environmentally, economically and fiscally sound,

integrated, continuously improving, efficient, and sustainable manner."38 The order defines "sustainable" as "conditions, under which humans and nature can exist in productive harmony, that permit fulfilling the social, economic, and other requirements of present and future generations of Americans."39 To implement that policy, agencies are tasked with improving their energy efficiency and reducing their GHG emissions by decreasing their energy use

by thirty percent by 2015.40 In May 2007, President Bush issued Executive Order 13,432, "Cooperation

Among Agencies in Protecting the Environment with Respect to Greenhouse Gas Emissions from Motor Vehicles, Nonroad Vehicles, and Nonroad

Engines."41 This order set as its main objective the cooperation of several federal agencies to protect the environment "with respect to greenhouse gas emissions from motor vehicles, nonroad vehicles, and nonroad engines, in a

manner consistent with sound science, analysis of benefits and costs, public safety, and economic growth."42

These two recent executive orders highlight the Federal Government's

growing commitment to reducing the GHG emissions of actions taken by or

supported by the Federal Government. While Executive Order 13,423 gives specific target dates, the language of both orders is fairly broad and could en

compass a range of agency actions toward reducing GHG emissions, includ

ing the purchase of carbon offsets if the stated energy reduction is deemed

impossible.43

35. Carbon Offsets, supra note 11, at 7. 36. Exec. Order No. 13,423, 72 Fed. Reg. 3,919, 3,919 (Jan. 26,2007). 37. Id. 38. Id. 39. Id. at 3,922-23. 40. Id. at 3,919. 41. Exec. Order No. 13,432, 72 Fed. Reg. 27,717, 27,717 (May 16, 2007). 42. Id. 43. Id.; Exec. Order No. 13,423, 72 Fed. Reg. 3,919 Q*n. 26, 2007).




In addition to the recent Executive Orders, the U.S. Supreme Court weighed in on GHGs in Massachusetts v. Environmental Protection Agency in 2007.44 In this landmark case, the Supreme Court held, 5-4, that the Environmental Protection Agency (EPA) does have the authority to regulate the emission of carbon dioxide and other GHGs under the Clean Air Act if it finds that the

gasses may "reasonably be anticipated to endanger public health or welfare."45 In response to the Court's holding, EPA issued findings indicating that GHGs in the atmosphere do endanger the public health and welfare.46 Most recently, the House of Representatives passed the American Clean

Energy and Security Act of 2009.47 The Act calls for investment in alterna tive energy, mandates green building standards, and delineates the creation of a federal cap-and-trade program for major emitters of GHGs.48 The Environment and Public Works Committee of the Senate is now creating its own climate legislation.49 If a Senate bill passes, it would have to be rec

onciled with the House bill before being voted on by both houses and sent to President Obama.50 While the passage of a similar bill in the Senate is

uncertain,51 the House bill's passage is evidence of growing congressional at tention to global warming and climate change issues.

Every branch of the Federal Government has weighed in on the current climate change issues and expressed concern and motivation towards action, and they are not alone. The international community is increasingly respond ing to the need for GHG emissions reductions by offsetting its own emissions

through the carbon offset market.52 The House's purchase in 2008 suggests that the U.S. Government may be following the recent international trend.53

State governments are already moving in the direction of the trend. Ten states in the Northeast and Mid-Atlantic regions of the United States have created their own cap-and-trade program to reduce GHGs, the Regional

44. 549 U.S. 497, 532 (2007). 45. See id. ("Because greenhouse gases fit well within the Clean Air Act's capacious definition

of 'air pollutant,' we hold that EPA has statutory authority to regulate the emission of such gases from new motor vehicles.").

46. Proposed Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202(a) of the Clean Air Act, 74 Fed. Reg. 18,886 (Apr. 24, 2009) (to be codified at 40 C.F.R. ch. 1).

47. American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong. (2009). 48. See John Larsen, World Resources Institute, A Closer Look at the American Clean Energy

and Security Act, http.7/www.wri.org/stories/2009/07/closer-look-american-clean-energy-and security-act (July 2, 2009).

49. Id. 50. Id. 51. See Environment & Energy Daily, Senate Climate Debate: The 60-Vote Climb, http://

www.eenews.net/eed/documents/climate_debate_senate.pdf (last modified July 28, 2009). 52. See United Kingdom Department for Food, Environment, and Rural Affairs, Carbon

Offsetting: UK Government Emissions, http://www.defra.gov.uk/environment/climatechange/ uk/carbonoffset/govt.hmi (last modified Jan. 30, 2009). Through the creation of the Carbon

Offsetting Fund, the UK Government has begun offsetting all of the GHGs emitted through government and official air travel. Id.

53. See id.; see also Kollmuss et al., supra note 8, at v.




Greenhouse Gas Initiative (RGGI).54 Arizona and New Mexico created the Southwest Climate Change Initiative, agreeing to work together to reduce emissions.55 In 2007, five states created the Western Regional Climate Action

Initiative, two of which were Arizona and New Mexico.56 The memorandum of understanding created by the governors of the five states includes provi sions for the creation of a regional cap-and-trade program.57

These actions by federal, state, and international bodies are just a sampling of those taken with regard to climate change in recent years. They all point to an increase in government activity around climate change, including in creased participation in the carbon offset market. As both state governments and the Federal Government continue to become more active in the climate

change arena by purchasing in the carbon offset market, they must create

procedures to avoid several potentially problematic areas of the market.58

in. GOVERNMENT PURCHASING IN THE CARBON OFFSET MARKET

Due to the lack of competition, transparency, and integrity, government participation in the voluntary carbon market triggers potential problems within these three pillars of a successful government procurement system.59 Adequate competition, transparency, and integrity help to create confidence that government actors are spending taxpayer dollars in the most effective

way possible.60 The following sections will address each of these areas in turn,

pointing out specific difficulties that should be addressed and providing po tential solutions for resolving those difficulties.

A. Lack of Competition Full and open competition is a bedrock principle of the U.S. federal pro

curement system.61 Title 41 of the U.S. Code requires that an executive

54. Charles Openchowski, The Next Greenhouse Gas Executive Order? 3 8 Envtl. L. Rep. News &

Analysis 10,077, 10,082 (2008). 55. Richard B. Stewart, States and Cities as Actors in Global Climate Regulation: Unitary vs. Plural

Architectures, 50 Ariz. L. Rev. 681, 685 (2008). 56. Press Release, Western Climate Initiative, Five Western Governors Announce Regional

Greenhouse Gas Reduction Agreement (Feb. 26, 2007), available at http://www.westernclimate

initiative.org/ ewebeditpro/items/0104F12 774.pdf. 57. Id. All of these programs can be characterized as part of the regulatory carbon offset mar

ket, as opposed to the voluntary carbon offset market this paper addresses. However, their exis

tence is an example of the growth of emissions reduction schemes in the United States.

58. These procedures will be laid out in Part IV.

59. See Steven L. Schooner, Desiderata: Objectives for a System of Government Contract Law, 11

Pub. Procurement L. Rev. 103, 104 (2002). 60. See id. ("[0]ur system, for the most part, encourages participation by the widest possible

pools of potential competitors; it consistendy demonstrates that competitors will be impartially considered for award of our contracts; and it treats all contractors in a manner that balances ap

propriate risks with meaningful profit incentives and rewards."). 61. See id. ("We promote competition because we believe in the power of the marketplace. By

maximizing the effective use of competition, the government receives its best value in terms of

price, quality, and contract terms and conditions.").




agency, "in conducting a procurement for property or services, shall obtain full and open competition through the use of competitive procedures in ac

cordance with the requirements of this subchapter and the Federal Acquisition Regulation."62 Competition ensures that contractors stay motivated to create the best product they can at the lowest price for the Government.63 Without

adequate competition, contractors may have limited incentive to lower the

prices of their goods while creating the best quality products.64 Competition is built into many markets, but the voluntary carbon mar

ket lacks some inherent competitive checks generally found in private mar kets.65 In most private markets, the competing interests of the buyer and the seller naturally balance each other out.66 According to Anja Kollmus of the Stockholm Environment Institute, in a traditional private market "[pjroducers try to maximize both price and the number of items sold or services rendered,

whilst buyers try to lower the price and minimize the number of products they must purchase to satisfy their need."67 However, the voluntary carbon market lacks that balancing because both the buyer and the seller benefit from maxi

mizing the number of offsets a project generates.68 While there are competing interests with respect to the pricing of offsets, both parties have an incentive to overestimate the number of offsets created by a particular project.69

For example, a carbon offset creator wants his emissions reduction proj ect to produce as many carbon offsets as possible. The more offsets created, the more profit for the creator. The purchaser of the carbon offsets also

wants the project to produce as many offsets as possible. The more offsets

created, the more of the purchaser's own emissions are countered. Each

party wants the project to create as many offsets as possible. This lack of

competing interests is an inherent flaw in the structure of the voluntary market, but it is one that can be addressed through the use of stringent verification procedures.70 Verification procedures ensure that the methods used to determine the number of offsets create accurate results. These pro cedures will be addressed in several of the following sections.

Competition concerns exist within the voluntary market before the Government ever gets involved as purchaser, but the Government has the additional requirement of full and open competition.71 The federal procure

ment system should promote full and open competition by using transpar ent processes to determine the Government's needs and create specifications

62. 41 U.S.C. ? 253(a)(1) (2006). 63. Schooner, supra note 59, at 104. 64. See id. 65. Kollmuss et al., supra note 8, at 33. 66. Id. 67. Id. 68. Id. 69. Id. 70. Id. 71. See 41 U.S.C. ? 253(a)(1) (2006).




that present those needs to the potential market participants.72 While there

may be many entities that participate in the market, the only ones that truly factor into the Government's procurement process are responsible bid ders with the ability to create a responsive bid or quote in response to the Government's solicitation.73 By the same token, while there may be numer ous participants in the voluntary carbon market, there also may be a very limited number of those who can make responsive bids and be deemed re

sponsible as government contractors. Those without the capacity to meet the specifications can no longer be considered members of the competitive pool.

In the United States, the Chicago Climate Exchange dominates the vol

untary market; it was even called on by the U.S. House of Representatives to carry out their offset purchases.74 CCX is considered by many in the field to have created the only viable and legally binding set of standards for the

trading of carbon offsets.75 However, choosing to use CCX is not the same as

choosing the project from which to receive offsets. Offset-producing projects are listed in a CCX registry, and purchasers are able to purchase based on

those listed.76

Thus, within the current structure of the voluntary market, competition is sues exist at two levels. First, there are a limited number of trading companies, like CCX, through which the Government could purchase offsets. Second,

within whichever company the Government chooses, there are an enormous

number of actual offset projects that could potentially meet the Government's carbon offset criteria.

However, the more stringent the Government makes its standards in either of these areas, the smaller the number of potential participants. The current state of the market is such that there are already a very limited number of

companies through which the Government can purchase offsets, with some

considering CCX the only viable option.77 An effective procurement strategy

72. See id. ? 253a(a)(l) ("In preparing for the procurement of property or services, an executive

agency shall?(A) specify its needs and solicit bids or proposals in a manner designed to achieve full and open competition for the procurement; (B) use advanced procurement planning and

market research; and (C) develop specifications in such manner as is necessary to obtain full and

open competition with due regard to the nature of the property or services to be acquired."). 73. See FAR 9.103, 9.104-1. 74. House Buys Carbon Credits, supra note 1. When the House purchased offsets in 2007, CCX

performed a reverse auction to determine which projects would provide the offsets. Id. The out

come of the auction was 300 contracts, which represented 30,000 metric tons of carbon dioxide.

Id. 75. See id. ("A financial institution, CCX is the world's first and North America's only volun

tary, legally binding greenhouse gas emissions reduction, registry and trading system."). 76. See Chicago Climate Exchange, Offset Project Registration, Verification and Crediting

Procedure, http://www.chicagoclimatex.com/content.jsf?id=104 (last visited Aug. 23, 2009). 77. See Carbon Offsets, supra note 11, at 47 ("According to [the House Chief Administrative

Officer's] officials, CCX was the best option for the House because it is well established relative to the rest of the industry, has clear verification and monitoring standards, and allows for the

anonymous purchase of offsets.").




will need to include safeguards to ensure that the bidding procedures comply with requirements of full and open competition.78

B. Lack of Transparency

Transparency in the procurement process is crucial in ensuring that gov ernment business is "conducted in an impartial and open manner."79 There are a number of hallmarks of a sufficiendy transparent procurement system, including the presence of (1) rules defining how the system works, (2) speci fications detailing what the Government requires in a particular purchase, (3)

specifications detailing how offerors will be evaluated, (4) information dis seminated to the offerors and the public indicating who received an award and

why, and (5) procedures whereby losing bidders can protest the process.80 Transparency is not necessarily highly valued in private markets.81 The

limited transparency of any particular market does not preclude government participation in that market, but it does require enhanced efforts to ensure

that the Government's dealings in the market are transparent.82 Difficulties with transparency in the voluntary carbon offset market relate primarily to

quality assurance mechanisms and the determination of offset value.

1. Quality Assurance Mechanisms and Transparency One complaint repeatedly directed at the voluntary market is that there

is a dangerous lack of transparency.83 There is currendy no regulatory body that holds responsibility for overseeing the carbon offset market.84 Under the Commodities Exchange Act, brokerage companies like CCX are subject only to limited oversight under the Commodities Future Trading Commission.85 For the carbon market in general, this lack of oversight translates into a lack of uniform standards throughout the market. Because carbon offsets are "an

intangible good," their "value and integrity depend entirely on how they are

defined, represented, and guaranteed."86

78. Part IV will address safeguards to help ensure full and open competition with responsible bidders.

79. Schooner, supra note 59, at 105. 80. Id. at 105-06. 81. Id. at 106 ("[I]t is important to remember that, in the private sector, transparency is rarely

considered, let alone valued at a premium. Accordingly, transparency often proves antithetical to what are perceived as commercial practices.").

82. See id. ("Nonetheless, to the extent that the public's funds are being spent, we believe that

maintaining transparency is worthwhile."). 83. See Carbon Offsets, supra note 11, at 7. 84. See id. The American Clean Energy and Security Act mandates the creation of an Offsets

Integrity Advisory Board, which would assist the administrator in promulgating regulations that would ensure integrity in the offsets program. American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong. ? 731(a) (2009).

85. See Carbon Offsets, supra note 11, at 19. 86. Voluntary Carbon Offsets?Getting What You Pay For: Hearing Before the H. Select Comm. on

Energy Independence and Global Warming, 110th Cong. 6 (2007) [hereinafter Hearing (testimony of Derik Broekhoff, Senior Associate, World Resources Institute), available at http://pdf.wri. org/20070718_broekhoff_testimony.pdf.




Uniform standards in any market ensure that a purchaser knows the crucial characteristics of the product purchased. For instance, when an individual

purchases an Energy Star appliance, he knows that the appliance conforms to certain predetermined specifications regarding the amount of energy that it uses and/or saves.87 If there were no standards, then any manufacturer could claim that his appliance was energy efficient, but a purchaser would not know what that claim meant. Similarly, in the voluntary market, a lack of uniform standards leaves a purchaser with the responsibility of determining whether the seller's claims actually conform to the purchaser's understanding of those claims.

Not only is there a lack of uniform standards, but there is also often a lack of data on the quality assurance mechanisms that a retailer uses to ensure that its offsets are credible. Quality assurance mechanisms can and should be ap plied at multiple stages in the creation of offsets.88 Different offset retailers

provide different types of information about the quality assurance methods involved in their offset programs, and many provide very little information at all.89 Therefore, a purchaser may receive very minimal information about the

project from which the offsets were created.90 If a purchaser does not know what mechanisms have been applied or when,

that purchaser cannot be sure that he is getting what he believes he has pur chased. When the Government Accountability Office purchased offsets as

part of its research of the market, the researchers stated, "[o]verall, we did not

always obtain sufficient information to understand exactly what we received as a result of the transaction."91

Thus, the lack of transparency within the market itself translates into a lack of transparency in the purchasing process when the purchaser does not have the benefit of full disclosure about the product. In many private markets, a con sumer could do his own research to determine whether the purchased product satisfies his criteria and conforms to his beliefs about the value of what he has obtained. However, the creation of offsets in the voluntary market is often an extended process over a large geographic area involving numerous trans

actions and varied entities.92 According to the Federal Trade Commission, " [inadequate tracking and verification systems could lead to substantiation

problems, even for marketers acting in good faith, and create opportunities for bad actors to deceive consumers."93 Even a substantial amount of due dili

gence by the purchaser could result in a very limited amount of information.

87. See EnergyStar.gov, About Energy Star, http://www.energystar.gov/index.cfm?c=about. abjndex (last visited Aug. 23, 2009).

88. See Carbon Offsets, supra note 11, at 24. 89. Id. at 8. 90. See Guides for the Use of Environmental Marketing Claims; Carbon Offsets and Renewable

Energy Certificates; Public Workshop, 72 Fed. Reg. 66,094, 66,096 (Nov. 27, 2007). 91. Carbon Offsets, supra note 11, at 8. 92. See id. at 3. 93. 72 Fed. Reg. at 66,096.




2. Offset Value and Transparency While transparency has independent value in a government purchasing

program, much of its significance is rooted in the need to accurately deter mine the value of what has been obtained. The sale or purchase of a carbon offset is really only valid if the offset itself is credible.94 If the offset is not cred

ible, then nothing of value has actually been traded.95 The intangible nature

of the product being purchased makes a rigorous examination of transparency issues even more important than in standard private markets.96 Determining credibility is, in large part, a practice of assessing the merit and feasibility of the standards set in place in a particular market.97

One of the main standards used to assess the credibility of a carbon offset is additionality. A test for additionality attempts to discern whether an offset

project would have happened without the financial incentive created by the offset market.98 For instance, if a power plant is required by state regulation to reduce its emissions by a certain percentage, then the power plant could not

purport to create a credible offset by reducing its emissions by that percent age. The reduction was a project the power plant would have undertaken with or without the financial incentive provided by the offset market, and therefore fails the additionality test. The previous example is fairly straightforward, but

determining whether an offset is additional is, in reality, an inherendy dif ficult process.99 Because an offset is generally created by not doing something (such as emitting GHGs), determining additionality is basically determining

whether something that would have occurred in fact did not occur.100 Some argue that additionality should not be a key concern in the carbon

market; they argue that the emphasis should simply be on rewarding any reduc tion of GHG emissions, whether additional or not.101 While their arguments may have merit from a purely environmental standard, the Government's in terest in purchasing carbon offsets is not simply to reward the reduction of emissions but rather to offset its own emissions. If the emission reduction the Government purchased would have occurred anyway, then it has spent taxpayer funds on nothing. The value of the transaction might be akin to the

Government paying an individual for an easement to walk on a part of his lawn that, to the surprise of both parties, turns out to be public property.102

94. See Hearing, supra note 86, at 6. 95. See id. 96. See id. 97. See id. at 7. 98. Kollmuss et al., supra note 8, at vii. 99. Carbon Offsets, supra note 11, at 26.

100. /</. 101. Id. at 25 ("However, certain stakeholders said that additionality is not a critical factor

at this early stage in the development of carbon markets and that the key goal should be to

keep transaction costs and barriers to entry low to create financial incentives for reducing emis

sions."). 102. Because of the lack of universal registries, it is possible for good faith projects to end up

being nonadditional.




To further complicate the issue of additionality, not all retailers use the same standards by which to determine whether a project is additional.103 The two

main tests are project-based testing and performance standards.104 Project based testing evaluates each project individually, whereas performance stan dards establish a general threshold for technologies or processes by which to evaluate all projects.105 Each mode of testing has its own advantages and

disadvantages, the main concern of each being that they are not perfectly ac curate.106 A lack of accuracy means that sometimes projects are determined to be additional when they are not.

CCX, the most prominent retailer in the United States, does not define a distinct additionality test, but its process is most similar to performance stan dards.107 CCX's rules lay out strict eligibility requirements that include some of the facets of additionality, such as requirements that the project go beyond regulatory requirements, that the projects are new, and that the projects in volve highly unusual practices for a particular industry.108 With so many varied standards and the realization that none of them are perfect, the Government is at risk of purchasing an offset that turns out to be nonadditional and, thus, of little value.

Lack of transparency is also of particular concern in the carbon market be cause of the wide variance in pricing. In 2007, the market price for the offset of a ton of carbon in the global market ranged from $1.83 to $306.00, with

$6.00 as the average price.109 The difficulty and location of the project, the administrative costs, delivery guarantees, and costs added by the retailer all affect the ultimate market price of an offset.110 While a purchaser may know the offset price that has been quoted, he may be unaware of or not understand the factors that went into creating that price. Because there is so much vari

ability in almost every facet of the market, determining whether the market

price accurately correlates to value received is often very difficult.111 That difficulty is arguably partly responsible for the House of Repre

sentatives, recent choice to discard its carbon neutral goal by announcing that it would be purchasing no carbon offsets in the coming year.112 After its initial purchase, the House received criticism when The Washington Post and other news outlets reported that the value of the offsets was unclear and

103. See Kollmuss et al., supra note 8, at 15. 104. Id. 105. Mat 15-16. 106. Id. at 17. 107. See id. ("Additionality testing is not a distinct step. However, CCX rules explicitly define

project eligibility requirements on the bases of these indicators: beyond/before regulatory re

quirements, new projects, highly unusual practices."). 108. See id. 109. Carbon Offsets, supra note 11, at 7. 110. Kollmuss et al., supra note 8, at 42-43. 111. See Carbon Offsets, supra note 11, at 11. 112. Fahrenthold, supra note 4.




that the projects appeared to have lacked additionality.113 Representative Dan

Lungren stated, with regard to the decision to purchase no more offsets,

"[m]aybe they're admitting that what we did [in purchasing offsets] was actu

ally nothing."114 Had the House implemented appropriate measures to ensure

that the offsets it received were credible, it might have been able to avoid much of the public criticism in response to its purchase. If there had still been criti

cism, the House would have been able to respond with records showing the offsets were, in fact, credible and equal to approximately $90,000 in value.115

Simply because a private market has defects in its transparency does not

automatically mean that government purchases in that market will lack trans

parency. However, there are hurdles that must be overcome in order to ensure that there is adequate transparency on the purchasing end of the transaction. For instance, if a federal agency were to purchase 500 offsets from CCX, the transaction should have sufficient transparency so that another trading com

pany would have notice of and an opportunity to participate in the sale.116 If there is no transparency about the way the transaction worked or about

the standards applied to the purchased offsets, then other potential bidders would have no means by which to determine whether they could have been

participants or might want to be participants in the future. Similarly, if bid ders or potential bidders want to protest the way in which a solicitation was carried out, lack of transparency in the process will make information gather ing and evaluation of the purchase quite difficult.

C. Lack of Integrity A federal procurement system should ensure that there is integrity in the

purchasing of products and services with the use of taxpayer funds.117 Many procurement rules in the United States have been created to minimize the risk of conflicts of interest, bribery, and favoritism in the procurement process.118

When the House of Representatives purchased offsets in 2007, the chief administrative officer asked that he not be told the locations of the projects

113. See David A. Fahrenthold, Value of U.S. House's Carbon Offsets Is Murky, Wash. Post, Jan. 28, 2008, at Al; see also Joseph Romm, Funds for Offsets Shouldn't Reward Past Environmental

Behavior, Grist, Jan. 28, 2008, http://www.grist.org/article/house-carbon-offsets-a-waste taxpayer-money.

114. See Fahrenthold, supra note 4. Dan Lungren is the ranking Republican on the House administration committee. Id. The House administration committee oversees the office that

originally purchased the offsets. Id. Spokesman Jeff Ventura stated, "Although original 'carbon

neutrality' targets were achieved [in the last Congress], we recognize a widely accepted standard for 'absolute neutrality' does not exist, nor is there any formal accreditation process to certify an

organization is carbon neutral." Id. 115. See Fahrenthold, supra note 113. 116. Steps necessary to create a transparent procurement system will be discussed in Part IV 117. See Schooner, supra note 59, at 104 (quoting FAR 3.101-1). 118. See id.; see also FAR 3.101-1 ("Government business shall be conducted in a manner

above reproach and, except as authorized by statute or regulation, with complete impartiality and with preferential treatment for none. Transactions relating to the expenditure of public funds

require the highest degree of public trust and an impeccable standard of conduct. The general




that created the offsets.119 He was concerned about conflicts of interest or the

appearance of conflicts of interest if House members pushed for the offset

creating projects to occur in their states.120 His concern was valid; the prob lem is that offset projects in the current domestic market are often largely focused in a few states. In 2007, offset projects produced offsets in forty states; however, thirty-four percent of the supply of offsets was produced in just two states: Texas and Virginia.121 Therefore, revenue and jobs created as a result of offset production have been largely centered in a few geographic areas. This limited geographic diversity can create an "appearance of a conflict of interest in Government-contractor relationships" when the Government in

direcdy supports one jurisdiction by purchasing offsets that were created in that jurisdiction.122

Integrity concerns are compounded by the current state of the acquisi tion workforce in federal procurement. Reforms to the federal procurement program in the 1990s led to a decrease in the number of acquisition person nel, which reduced the level of internal oversight in the process.123 Fewer

personnel and reduced oversight are not necessarily a detriment for every government purchase, but they are problematic when the purchases are in an unregulated market like the carbon offset market.124 The need for greater oversight will be addressed in more detail in Part IV C.

IV. ISSUES TO CONSIDER WHEN FORMULATING A SOLUTION

Recognizing many of the flaws in the current voluntary carbon offset market may lead some to conclude that the Federal Government should use

its purchasing power elsewhere. However, in light of the current trend to wards government participation in the market, the better course is to ad dress the major problem areas and delineate recommendations to safeguard the Government's future investments in the voluntary market. The following recommendations for adequately ensuring competition, transparency, and

rule is to avoid strictly any conflict of interest or even the appearance of a conflict of interest in Government-contractor relationships. While many Federal laws and regulations place restric

tions on the actions of Government personnel, their official conduct must, in addition, be such

that they would have no reluctance to make a full public disclosure of their actions."). 119. Fahrenthold, supra note 113. 120. Id. ("Daniel P. Beard, the House's chief administrative officer, said he asked the Chicago

exchange for offsets based only on U.S. projects. But, he said, he asked not to be told where the

projects were, so representatives could not buttonhole him about projects in their districts."). 121. See Carbon Offsets, supra note 11, at 17. 122. See FAR 3.101-1. 123. See Steven L. Schooner, Fear of Oversight: The Fundamental Failure of Businesslike

Government, 50 Am. U. L. Rev. 627, 629 (2001). 124. As previously stated in note 84, the American Clean Energy and Security Act does man

date the creation of an Offsets Integrity Advisory Board, which would assist the administrator in promulgating regulations that would ensure integrity in the offsets program. American Clean

Energy and Security Act of 2009, H.R. 2454, 111th Cong. ? 731(a) (2009).




integrity are intended as a guideline for policy to be adopted and promulgated in the Federal Acquisition Regulation (FAR).

A. Ensuring Competition

Ensuring full and open competition is a necessary component of the U.S. federal procurement system.125 The underlying goal of the Competition in

Contracting Act is to ensure that the broadest number of possible offerors can

participate in a solicitation for government needs.126 In addition to working towards a broad pool of offerors, the Contracting Officer (CO) must deter

mine that the selected offeror is responsible.127 Providing clear specifications in government solicitations for carbon offsets will benefit the CO by ensuring that only responsible offerors bid for the job.128 In an industry with such vary ing standards, responsibility determinations become increasingly important.

Subpart 9.104-1(e) of the FAR states that in order to be responsible, a pro spective contractor must "[hjave the necessary organization, experience, ac

counting and operational controls, and technical skills, or the ability to obtain them."129 The FAR further defines these requirements as including, where

necessary, "such elements as production control procedures, property control

systems, quality assurance measures, and safety programs applicable to mate rials to be produced or services to be performed by the prospective contractor and subcontractors."130 Being able to guarantee that offset projects will be sub

jected to stringent quality assurance measures should be a strict requirement of any entity hoping to sell carbon offsets to the Federal Government.131

FAR 9.104-1 also requires that a contractor have a "satisfactory perfor mance record" in order to be deemed responsible.132 In the voluntary market, a satisfactory performance record should include a high percentage of trans actions that resulted in the transfer of credible, additional offsets to a knowl

edgeable buyer. Focusing on contractors with a satisfactory performance record is particularly important in the voluntary carbon market because agen cies like the Federal Trade Commission do not have authority to establish "environmental performance standards" for these retailers.133

125. Schooner, supra note 59, at 104. 126. See 10 U.S.C. ? 2304(a)(1)(A) (2006). 127. See FAR 9.103, 9.104-1. 128. See FAR 9.103, 9.104-1(e). 129. FAR9.104-l(e). 130. Id. 131. As addressed in Part III.A, determining which contractors have sufficient quality assur

ance measures is not an easy task. Part IV.B will further discuss what quality assurance mecha nisms the Government should look for in a responsible offeror.

132. FAR9.104-l(c). 133. See Guides for the Use of Environmental Marketing Claims; Carbon Offsets and

Renewable Energy Certificates; Public Workshop, 72 Fed. Reg. 66,094, 66,096 (Nov. 27, 2007). Because the FTC does not have authority over the carbon market, its efforts will focus on a "traditional consumer protection role, addressing deceptive and unfair practices under the FTC

Act." Id. See also note 84, supra, for a potential source of regulations ensuring integrity in the offsets program.




A system with strict responsibility requirements and limited specifications will automatically reduce the number of entities that are able to compete for a contract with the Federal Government. While this reduction may appear to limit full and open competition, it is necessary to ensure that the pool from

which the Government makes its choice consists of bidders able to provide the Government with a product that meets its needs. In this case, that product consists of carbon offsets that are determined to be credible through adequate quality assurance mechanisms.134

B. Ensuring Transparency

Creating clear and precise specifications is the first step towards ensuring transparency in the Government's purchase of carbon offsets.135 The most im

portant specification is that the retailer has a transparent market system. Two

key components of transparent systems in the voluntary market are registries and third-party verification.136

A single registry for all carbon offsets in the market?both voluntary and

regulatory?would be the surest way to create transparency because the sta tus of particular offsets would be available to all consumers.137 However, a

full-market registry does not currently exist.138 Therefore, the Government should require the next best safeguard?retailers with their own registries.

The main benefits of registries are twofold. First, registries provide publicly available information identifying each offset project.139 Second, registries track offset transactions so that the information in a registry can be used to

determine where an offset originated, what transactions it has been involved

in, and who currently owns it.140 The second recommended component of a transparent system for pur

chasing in the voluntary market is the requirement that the retailer's stan dards include third-party verification. Verification is the process by which a

party confirms the amount of emissions reduction that has occurred from a

particular, properly implemented project.141 The verification process can be carried out by the project developer or by an independent, certified auditor.142

While verifications carried out by the project developers are not necessarily inadequate, there is an obvious conflict of interest when the developer of a

project is verifying his own work.143 Even an honest developer performing a

134. Quality assurance mechanisms will be addressed in Part IV.B, Ensuring Transparency. 135. See Schooner, supra note 59, at 105-06.

136. See Kollmuss et al., supra note 8, at 14.

137. See Carbon Offsets, supra note 11, at 28.

138. Id. The American Clean Energy and Security Act does include provisions mandating the

creation of a federal offset registry. American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong. ? 732(d) (2009).

139. Kollmuss et al., supra note 8, at 39. 140. Id. 141. Jtf.at34. 142. See id. 2it35. 143. Id.




good faith verification would have an incentive to evaluate his project in the most positive way.144

To ensure the highest level of transparency possible, the FAR should in dicate a preference for retailers that provide third-party verification. The re

cords produced by the independent auditors will act as an additional means

of ensuring not only that the offset transaction is only transparent, but also that the creation of the offsets also has been transparent.145 CCX has third

party auditors and creates an additional level of transparency and quality as surance by requiring projects to go through a final approval process by the CCX Board.146 While heightened transparency measures like these do not

absolutely guarantee that offsets will be credible, they do show that the high est level of care has been taken to increase reliability.

The final level of transparency relates to the status of an offset project at the time that the Government makes the purchase. The most reliable way to ensure that offsets the Government purchases are credible and are supported by transparent records is to limit the Government's purchasing power to off sets that already have been generated at the time of the purchase.147 While a project's offset capacity can be determined using ex-ante calculations, the chance that the project would never occur or that the calculation would be inaccurate leaves the Government open to the risk of failing to obtain a cred ible offset.148 While inaccurate calculations are still a possibility with ex-post accounting, there is no question about whether the project occurred, and the offsets generated are more easily accounted for.149

Requiring transparency in government purchasing of offsets benefits both the Government and those who choose to contract with the Government.

Transparency helps to ensure that offsets the Government obtains have the value the Government believes they have. It also ensures that those who de sire to contract with the Government to provide offsets know exactly what

quality assurance mechanisms they must provide in order to do so.

C. Ensuring Integrity There are two major methods by which integrity is maintained in any

system of government administration: external oversight and internal over

sight.150 External oversight generally consists of litigation that occurs after

144. Id. 145. See id. 146. See id. at 35, 38. CCX is one of the only voluntary market participants that employs this

additional step. See id. at 35. 147. See Carbon Offsets, supra note 11, at 28. 148. See id. ("Some stakeholders also pointed out that projects that use future value accounting

practices to calculate offsets may be less credible."). 149. See Kollmuss et al., supra note 8, at 34. 150. See Schooner, supra note 123, at 629-30.




the goods or services have been procured.151 For instance, if a prospective bid der suspects that the CO was operating under a conflict of interests when he awarded the contract, the prospective bidder can bring suit against the agency and make the claim in court.152 The inference, of course, is that the fear of

litigation will act as a check on the process. However, external checks do not

always work; the bad actor is not always discovered.153

Therefore, ensuring integrity also requires internal oversight. In the cur rent system of federal procurement, a CO has a large degree of discretion when making purchases for the Government.154 This discretion allows pro curements to progress more quickly and efficiendy.155 However, the high levels of discretion and efficiency can limit another necessary component?

integrity.156 For instance, purchases under $100,000 are eligible for simplified procedures under the FAR.157 If a federal agency had been making the car

bon offset purchase the House made in 2007, that purchase would have been within the monetary threshold making it eligible for simplified procedures. Under these procedures, there is virtually no scrutiny of the actions of the CO.158 Those that argue for increased discretion laud the ability of COs to

make autonomous business judgments.159 While there are surely many situ ations in which the CO has sufficient knowledge and expertise to make rea

soned business judgments, the carbon offset market is highly complex and

purchasing in the market requires specific training. The voluntary carbon offset market is an intricate, private, unregulated

market with unique issues. As the market grows, greater public understand

ing and confidence around the market may warrant a higher level of discre tion for those who make purchases within it. However, the concerns about

competition and transparency in the current market create a heightened need for oversight so that there is no question that the Government is acting with

integrity. In the same way in which CCX creates greater confidence in its

product by installing multiple levels of verification before accepting projects, so too should the Government ensure integrity by creating additional internal

oversight at a level above the CO.

151. See id. 152. See 28 U.S.C. ? 1491 (2006). 153. See Schooner, supra note 12 3, at 659-60. 154. See FAR 1.601, 1.602-1; see also Schooner, supra note 123, at 630 ("It is clear, however,

that the current system couples greatly increased buyer discretion with dramatically reduced

oversight."). 155. See Schooner, supra note 123, at 630.

156. See id. at 630-31 ("[T]he current paradigm elevates its facially attractive norms?

efficiency and discretion?at the expense of other established, yet apparently undervalued, norms

necessary to guide the procurement system, e.g., transparency, integrity, and competition."). 157. See FAR 13.301. 158. See Schooner, supra note 123, at 662. 159. See id. at 663.




V. CONCLUSION

The rapid expansion of the carbon offset market and the Government's

participation in that market present special difficulties for program manag ers and COs. However, if the procurement system addresses these difficulties

proactively, many potential problems can be avoided. The most important steps to take are those that ensure competition, transparency, and integrity in

government purchasing of carbon offsets.

First, adequate competition will result from a system with clear, strict re

sponsibility requirements, including satisfactory performance standards. Sec

ond, adequate transparency can be ensured through soliciting products only from retailers with sufficient quality assurance mechanisms. These mecha nisms include registries, third-party verifications, and ex-ante accounting of

previously created projects. Third, maintaining integrity in the purchasing process can be achieved by increasing internal oversight of carbon offset pur chases.

The carbon offset market is continuing to grow and transform as govern ments and the public learn more about climate change and become more ac tive participants. Additional challenges may arise as this market expands, and new procedures may have to be implemented. Taking these necessary actions to ensure that the purchases of carbon offsets comply with the principles of an effective public procurement system is a crucial first step.



purchasing in an unregulated market: federal government procurement of carbon offsets

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