Companies with poor records on environmental damage try for change

By James Kanter
Published: October 13, 2008

BARCELONA: Few people call it eco-friendly when a company like Royal Dutch Shell, to pump natural gas and make petroleum products, disturbs coral reefs and damages the habitats of rare desert truffles and vulnerable birds. But the energy giant may have found a way to turn local environmental losses into a plus for biodiversity - and its business.
To make up for lost habitats in Qatar, where it is building a vast natural gas operation, Shell plans projects in other parts of the emirate to increase the antelope population and help to preserve endangered turtles and sea-cows.
"Sometimes you say there are no good solutions, but then you can agree on compensating measures elsewhere," said Jeroen van der Veer, the chief executive of Shell. "We are an extractive industry and we do build large installations," but Shell "can only get those new projects if we are in harmony with society, and certainly with local society."
Companies like Shell are facing new threats to their business. Communities that oppose big mining and drilling projects have caused costly delays, while governments have used the environmental records of companies against them - as happened to Shell in Russia in 2006, when it ceded control of the Sakhalin Island oil and natural gas project to Gazprom under threat of huge fines by the country's environmental regulators.
At the same time, after decades of failing to win adequate support for their policies, large sections of the conservation and environmental movement are aligning their strategies with those of financiers and big business to improve the chances of meeting their goals.

That has opened up opportunities for companies to demonstrate a good track record on biodiversity management and to burnish their green credentials by participating in market-style systems they have helped to design and that have the approval of campaign groups.
The best known of these new markets involves generating and trading permits to emit carbon dioxide, a greenhouse gas. Under binding regulations in the European Union, companies like Shell buy or sell permits based on whether they overshoot or come in beneath their pollution targets.
So far, the EU initiative has had little impact on emissions, and it has been heavily criticized for enabling financiers to profit from carbon-cutting projects in the developing world, while providing industries with windfall profits even as they continue to pollute in Europe.
The kind of experiment that Shell is pursuing in Qatar could be even more controversial. Such projects could, one day, allow companies that damage habitats and ecosystems to earn "credits" by protecting habitats and ecosystems elsewhere. Backers of this approach say it should become standard business practice, with the credits traded on markets like carbon-emission permits.
But while carbon dioxide is the same gas everywhere, ecosystems differ. No two areas of biodiversity are identical, which makes valuing compensation for environmental damage extremely difficult.
Critics also say that such compensation projects could become a way for extractive industries to spend less on improving their site operations, giving them what some campaigners call "a license to trash" in exchange for a poorly monitored, hard-to-measure commitment.
"Offsets are actually a zero-sum game," said Richard Steiner, professor of environmental policy and marine conservation at the University of Alaska Fairbanks. "Eventually, there will be nothing left with which to offset anything - what then?"
Van der Veer said Shell aimed for maximum damage mitigation at its operating sites, and would use offsets only to make up for residual damage. At the same time, Shell officials say that if their offsetting activities produce a net environmental gain, the company could sell surplus biodiversity "credits" to other companies.
In a similar vein, Tom Albanese, chief executive of Rio Tinto, the mining company, said his company could generate new revenue streams by improving local community livelihoods and helping to dissuade people from further degrading forest and other natural habitats, and by improving plant and animal life on large areas of disused land owned by company.
That land represented "a biodiversity buffer that also could be used to create the next generation of green credits," Albanese said.
Already, companies like Shell and Rio Tinto build schools and clinics and provide water for communities near their operations, and pay compensation for local damage to protected areas.
But some companies are now moving toward a system of comprehensive offsets for all their environmental effects - a revolution in business behavior, said Kerry ten Kate, director of the Business and Biodiversity Offset Program at Forest Trends, a nonprofit group that promotes market-based methods of sustainable forest management.
Forest Trends jointly runs the program - involving more than 40 companies, banks and government agencies - with Conservation International and the Wildlife Conservation Society to help design and implement biodiversity offsets.

Ten Kate acknowledged the scope for abuse of voluntary projects. But she warned that governments would be more likely to regulate and legislate to halt biodiversity loss if companies failed to make a voluntary system work effectively.
Julia Marton-Lefèvre, director general of the International Union for Conservation of Nature, said she favored imposing global rules that would require companies to compensate for environmental damage - but she also said she had strong reservations about offset projects.
"We're all thinking, do we have even the ethical right to say, 'OK, we kill the lizards here, and we'll get some other ones over there?"' Marton-Lefèvre said. "We don't want symbolic offsets. We really want the real thing."
In the United States, a similar idea emerged from the 1972 Clean Water Act, which established strict guidelines for projects developed in wetland areas. Those rules eventually gave way to a system that allowed limited wetland development as long as developers purchased offset credits in wetland restoration projects elsewhere.
But that led to investors sometimes creating new wetlands rather than restoring natural habitats. These new wetlands often have failed to attract displaced wildlife species or to contribute effectively to water flow management.
"We've had frankly a very mixed experience," said Robert Wolcott, a senior advisor to the Ecological Research Program at the U.S. Environmental Protection Agency. "Something on the order of 30 percent of all our wetland offsets have failed."
At the same time, however, Wolcott said it was critical that businesses and governments seek improved market-based systems of environmental management. "Private, market-driven vehicles are the only means we have to backstop the depleting public budgets for natural resource protection," he said.
For some environmental experts, Shell's experiment in Qatar is part of that search. There, on a 300-hectare, or 740 acre, site near the northeast tip of the country, 35,000 workers are building the world's largest onshore facility, known as the Pearl project, to convert natural gas into fuel and lubricants. The natural gas, from offshore platforms, will be transported to the plant through two undersea pipelines.
Sachin Kapila, the biodiversity adviser at Shell, said the company was exploring whether other companies investing in the emirate might adopt similar biodiversity compensation practices. He also said Shell was discussing ways to ensure that biodiversity gains would be maintained after the Pearl project ended, some 25 to 30 years from now.
Assisted by ten Kate of Forest Trends, and by experts from the IUCN, the body run by Marton-Lefèvre, Shell this year finished assessments of the environmental consequences of the onshore site in Qatar. Now Kapila is selecting a site, or sites, to protect similar ecosystems.
Among places on his short list are Al-Reem, on Qatar's western coast - already part of a network of reserves recognized by the United Nations Education, Scientific and Cultural Organization - where the soils are similar to those around the plant, and where, according to Unesco, breeders are re-introducing endangered native species like the Arabian Oryx. Other options to offset damage to habitats include upgrading the protection at a nesting site for hawksbill turtles, which are listed as a critically endangered species, and which Shell officials say may be temporarily affected by the construction work. Coral has been transplanted from the affected area, and there are options to offset marine damage, including safeguarding other reefs.
"Do we entirely recreate what we've lost, or do we do something a bit different that could be beneficial in different ways for conservation or for the entire region?" Kapila asked. "There are many ways of thinking about how to win the best return for the conservation buck."