Carbon trading easy to say, not easy to describe

Ryan Ori

When Scott Settelmyer describes his company, TerraCarbon LLC, it's easy to describe the potential.

"I think it's an interesting field, and really it could be pretty big," Settelmyer said. "They're saying this could become a $2 trillion market (annually). Now it's $64 billion, according to the World Bank. This could be the biggest commodity market worldwide."

What isn't nearly so simple is explaining how it all works.

TerraCarbon specializes in carbon trading, which despite its rapidly emerging international market is a field unknown to most people.

Client Carol Jordan, president of Atlanta-based Environmental Synergy Inc., describes it this way: "Whenever anybody asks what I do, I always take a deep breath."

Carbon footprint

Settelmyer, 39, took a winding road to the carbon field.

His dad, Harry, is a stockbroker. By age 9, Settelmyer's paper route in Peoria provided money to invest in stocks.

"I literally would get my papers at the corner in the morning, and by the street light I was holding up the paper and checking the ticker to see if I made money on those stocks," Settelmyer said. "It was something I really connected with."

Settelmyer left Peoria for 20 years after finishing high school at Spalding in 1986. He earned a bachelor's degree in finance from the University of Illinois and a master's in financial markets and trading from Illinois Institute of Technology. He also is a certified public accountant and a charter financial analyst.

A former ALLTEL Corp. treasurer and Arthur Andersen manager in derivatives and risk management, Settelmyer lived in Chicago, London and Little Rock, Ark.

Meanwhile, innovative economist Richard Sandor was formulating a way to use financial markets to reduce greenhouse gas emissions. In the 1990s, Sandor developed a system for markets to drive decreases in sulfur dioxide emissions that were causing acid rain.

Earlier this decade, Sandor founded the Chicago Climate Exchange (CCX) to do the same with other types of emissions.

"The right wing always suspects you of being a tree-hugging environmentalist, and the left wing accuses you of being a money-grubbing capitalist," Sandor told The Wall Street Journal.

Settelmyer appreciates nature but doesn't consider himself a tree hugger. He became chief financial officer of CCX because he was intrigued by the novel approach of combining finance and environmental cleanup.

"From an environmental standpoint, I've always loved the outdoors," Settelmyer said. "But it's not just a sentimental thing for me. You can be very analytical about this and come to the same conclusion.

"The world population is booming. World resources are what they are, and they're not growing. There's only so much land, so much water, so much natural resources. There's got to be some better way in the market to meet it. It always made sense to me that there's got to be a market structure to these environmental goods. Clean air can't just be a free commodity. Polluting it can't come free."

CCX took off, and other carbon exchanges have been formed.

How it works

The carbon market emerged out of the Kyoto Protocol, which was negotiated in Japan in 1997 and took effect in 2005. Participating countries agreed to incremental reductions in carbon dioxide emissions.

The United States remains the lone Kyoto holdout among industrialized nations, but presidential candidates Barack Obama and John McCain have stated a desire to implement cap-and-trade systems in the United States.

"The carbon market feels very good about the next election, no matter who wins, because they both have said they're in favor of climate-change legislation and market-based cap-and-trade systems," Settelmyer said. "(President) Bush might have said he's in favor of it in theory, but unless China and India and other developing countries do something. ... These guys haven't said 'but.' They just say we need it."

Cap-and-trade systems require corporations to reduce emissions from year to year. Those who go beyond their required reductions in a given year receive carbon credits, which they can sell to entities that lag behind in compliance.

Critics view cap-and-trade as a cop-out that allows emitters to buy their way out of compliance. Proponents believe the free market is the most effective method to drive change.

"The idea was to design a marketplace where the people can do more than they're required," Settelmyer said. "If we say we need to reduce emissions by 5 percent, some people are going to be able to do 10 at very low costs, so give them an incentive to do that. ...

"If you don't apply this market mechanism, you wind up with significantly higher costs. Greenhouse gases in the U.S., the only thing holding back regulation is all about how you manage the cost."

Even without participation in Kyoto, U.S. states and regions are formulating emissions-reducing initiatives.

Several corporations lobby for federal legislation. Caterpillar Inc. is one of many corporations involved in the United States Climate Action Partnership (USCAP), which seeks national standards.

Many experts believe corporations would be better served by one national standard than to try navigating different rules in every state. Forward-thinking companies already are taking steps to comply with regulations they believe are inevitable. They also want input on setting regulations.

"They say if you're not at the table, you could be on the menu," Settelmyer said.

Branching out

After a year with CCX, Settelmyer left to specialize in one carbon niche: the offset market.

He moved back to Peoria with wife Lynne and sons Zach, 10, and Joe, 4, and co-founded TerraCarbon late in 2006.

Settelmyer's headquarters are in a wood-floored, barnlike structure across the driveway from his home near Donovan Golf Course.

Co-founder Bernhard Schlamadinger runs a second office out of Graz, Austria. One of the top forestry scientists in the world, Schlamadinger helped quantify the environmental impact of forestation and avoided deforestation.

As children learn in school, trees absorb carbon dioxide and emit oxygen into the atmosphere. By the process of carbon sequestration, trees grow.

The process of measuring that growth contributed to carbon offsets markets. Organizations that undertake large tree-planting or tree-preserving projects can be awarded with carbon credits. Those can be sold to corporations needing to offset emissions.

Some companies and individuals also purchase offsets voluntarily in order to reduce their "carbon footprint."

TerraCarbon - which also employs Virginia-based forestry expert David Shoch, formerly of The Nature Conservancy - serves as a consultant in offset carbon markets.

The company helps tree planters properly register projects with crediting organizations such as the United Nations' Clean Development Mechanism (CDM) in order to receive carbon credits. TerraCarbon also pairs offset buyers and sellers.

In some projects, TerraCarbon works as a consultant on both ends: registering the project to log the credits, then finding the buyer to purchase them.

Schlamadinger and Shoch provide the technical know-how for tree-planting projects on several continents.

"It's an amazingly small number of people worldwide who you could say are really experts in this area. You could count them on maybe two hands, and we've got two right now and a third we're working with on a subcontracting basis," said Settelmyer, who contributes the financial expertise.

ESI specializes in large-scale reforestation in the United States, often funded by corporations in conjunction with national wildlife organizations. TerraCarbon provides consulting for ESI.

"The science behind carbon sequestration is evolving, and they're really on the cutting edge through one of their technical people in particular, David Shoch," said ESI's Jordan. "They're really on the cutting edge of the physical measurement of carbon sequestration.

"Scott has such a unique combination of understanding financial models related to carbon offsets, from both the perspective of the client and the project developer. He's really good at helping bridge the interests of both the project developer and the funding clients."

In its brief existence, TerraCarbon already lists a wide area of activity: Belize, Chile, Costa Rica, Guyana, Indonesia and Mexico, among others. To keep up with an increasing demand for offset work, TerraCarbon likely will add employees soon.

Settelmyer embraces a cutting-edge profession requiring knowledge in finance, climate change, science, politics and people. He often travels abroad.

"What draws me to it is that it's so wide-ranging," Settelmyer said. "I've always liked working in the international arena. Every day, I'm talking to two or three continents. You just meet the most interesting people."

Ryan Ori can be reached at (309) 686-3264 or