Martin Hughes is not your typical hybrid-driving, clean-energy fanatic. Hughes and his wife, both longtime oil-industry veterans, zoom around Houston in no-compromise vehicles. His, a Nissan (NSANY) Xterra SUV. Hers, a zippy Volkswagen Passat.
Yet when Hughes heard last year about an environmental startup called TerraPass Inc., he was intrigued. The Menlo Park (Calif.) company sells "green tags," which cost up to $80 a year and which are designed to offset the emissions a car spews into the air during that period. After taking a small cut of each sale, TerraPass pools its members' fees and invests them in clean energy production, including wind power. Hughes checked out the service online last August and then forked over $129 for two TerraPass windshield decals. "I was impressed," he says. "It's a for-profit product that allows you to exercise your conscience."
TerraPass is channeling the good intentions of individual consumers concerned about carbon emissions, which are linked with global warming. U.S. companies are also adopting the certificates, in part because they wish to cater to this growing, green constituency. But the tags, which are now America's fastest-growing alternative-energy product, aren't simply a marketing vehicle. U.S. businesses have watched Europe and Japan adopt tough regulations on carbon emissions and say the tags could help them prepare for similar developments in the U.S.
Starbucks (SBUX) Corp. has been a leader in the green-tag movement, mainly because renewable power is still hard to come by. Last year, Starbucks made a pledge to buy 20% of the annual electric power for its North American stores -- about 150 million kilowatt hours -- from renewable sources. But no single wind farm can service all 8,400 of its U.S. coffee shops. In fact, many Starbucks have no means of hooking up to any renewable power producer.
So Starbucks stores continue to consume power as usual, but the company passes an extra payment of less than half a cent per kwh to a middleman called 3 Phases Energy Services in San Francisco. 3 Phases redistributes funds to 40 wind farms across the country, then issues a certificate. With this subsidy, the farms cut the price of their power and boost sales to local customers. The net effect: Nationwide, an amount of power equal to Starbucks' purchase is shifted to wind and away from conventional "dirty" sources.
A host of companies is now using this clever type of transaction to meet renewable energy targets, slash emissions, and make their brands stand out. Whole Foods Market Inc. (WFMI), based in Austin, Tex., turned to certificates in January, when it decided to offset 100% of its energy consumption with renewables. Whole Foods quickly became the biggest corporate buyer of such tags in the U.S. Safeway (SWY), Liz Claiborne (LIZ), and HSBC (HBC) have also made major pledges in the past year. "We'll see more and more reliance on [tags]" in coming months, says Blair Swezey, a policy adviser at the U.S. National Renewable Energy Laboratory in Golden, Colo.
Green tags come with a cost. For big purchases, the certificates can tack an extra 0.5% to 8% onto an energy bill. "It's not a financial hardship, but it is an incremental amount of money that's not required," says Steve McDougal, senior manager of business development at 3 Phases, which also supplies green tags to Johnson & Johnson (JNJ) and IBM (IBM). Still, the premium that most companies pay for green tags works out to far less than they would pay to buy renewable power directly from a patchwork of suppliers, McDougal says.
Now utilities are snapping up green tags as they scramble to meet new renewable energy regulations. To date, 23 states have adopted requirements that power companies replace a portion of the energy they sell with renewable power. California is committed to a goal of 20% by 2017, and New York has to hit 25% by 2013. In many cases, green tags offer the easiest path to meet the new minimums.
For retail operations such as Starbucks and Whole Foods, the tags help attract a green clientele. For industrial companies such as DuPont, Staples, and J&J, green tags are also a way to meet, or anticipate, regulations. With the carbon-restricting rules of the Kyoto Accord in effect in Europe, Canada, and Japan, many such companies are trying to align their U.S. operations with global practices. "We need to understand how to do business as a company in a carbon-constrained environment," says Mark Buckley, vice-president for environmental affairs at Staples Inc. (SPLS), which aims to reduce its emissions by 7% by 2010. Meanwhile, a clutch of state-backed and nonprofit auditors, such as Green-e in San Francisco, is trying to standardize how tags are measured and tracked.
While many companies are just beginning to experiment with green certificates, individuals are using them to offset the power consumed in everything from cross-country flights to wedding receptions and ski trips. At Mt. Hood Meadows Ski Resort, an hour east of Portland, Ore., 18,000 skiers purchased green tags this year. One was Allen Engle, an electrical engineer in Bend, Ore. He buys a $2 green tag along with his $48 lift ticket, to compensate for the power consumed on his day trip to the slopes. "To get any new technology started, you need incentives, like tax incentives," says Engle. For many companies and consumers, tags are an acceptable short-term cost.
By Heather Green