Tom Arnold had always considered himself environmentally conscious, but it took a trip to Antarctica's King George Island to help him realize it would be his life's work. While on an outing arranged by Wharton business school in 2004, Arnold awoke to unusually warm weather. He realized his sleeping bag and tent had become completely soaked by the melting ice of nearby glaciers.
"I woke up to climate change, quite literally," he says. "Our tents were floating in a pool of water."
During the course of the trip, designed to teach leadership lessons culled from the experiences of explorer Ernest Shackleton, Arnold met with scientists concerned about the possible extinction of local species as a result of global warming. It was a moment of epiphany for Arnold, who vowed to do something to help preserve the environment.
Back at Wharton, Arnold encountered a timely challenge from his operations professor, Karl Ulrich: to start a business based on the idea of selling carbon-offset credits online. Ulrich, a reluctant S.U.V. driver, had looked into buying such credits and had found that the offset market was available only to corporations. Figuring there must be others out there like himself, he brought the market opportunity to his students. He gave the class six weeks and $5,000 in startup capital.
What the students came up with was simple. Their plan was to develop a means of calculating the amount of CO2 released into the environment by daily car usage and then sell carbon-offset credits against it. The credits would then go toward clean-energy initiatives, which would reduce a comparable amount of CO2 emissions from being released into the environment. The students devised an algorithm, set up a website, and called their company TerraPass.
At the end of six weeks, 156 TerraPasses had been purchased on the company's website for a total of $8,000, most by family and friends referred by members of the student project. But 20 buyers-nearly 8 percent-had no connection to the class at all.
"These were just random people who had found out about it and got excited and wanted to be part of it," says Arnold. "That's when we really began to realize we had something."
TerraPass became a bona fide business after graduation. Arnold and a fellow student, Adam Stein, began raising money and moved the business to California. Their timing couldn't have been better; in 2006, An Inconvenient Truth was released. Seemingly overnight, combating global warming by reducing carbon-dioxide emissions became a national obsession, and dozens of businesses sprouted up to meet the demand for so-called carbon offsets. TerraPass was already there. That year, it sold 25,000 TerraPasses.
While the trend was taking off, so were the variety of TerraPasses available. A visitor to the company's site can now purchase the $79.95 Road Tripper (to offset 20,000 pounds of CO2 from car and truck usage); the $29.95 Around Towner (to offset 6,000 pounds of CO2 for car usage); or the $36.95 TerraPass Flight Offset Intercontinental (to offset 7,500 pounds of CO2 from air travel), among other passes. (A calculator on the site helps customers determine the amount of carbon emissions they are contributing via car or air travel.)
Many experts, however, view the carbon-offset movement with skepticism. "Right now, anyone can call anything an offset," says Joseph Romm, a former U.S. Department of Energy official and the executive director of the Center for Energy & Climate Solutions. "It's a voluntary, unregulated market and prone to abuse. There are companies peddling a lot of dubious stuff."
Arnold asserts that his firm's legitimacy lies in its investments. Income from credits is redirected to carbon offsetters, such as farmers building ion digesters, which capture CO2 produced by the release of methane on U.S. dairy farms; wind-power projects, which add clean energy to the power grid that consumers draw upon; and landfill operators building methane-gas-capture systems that trap and filter greenhouse gases emitted from landfills.
TerraPass declines to disclose its financial information, including revenue, profits, or even how much it has invested so far in carbon-offset projects. However, it's possible that the company has spent about $923,000 in offsetting investments this year, based on its expectation to have accumulated 450 million tons of CO2-offset fees. (The environmental-consulting group New Carbon Finance estimates that the average wholesale cost of offsetting CO2 is about $4.10 a ton but can range from 45 cents to $45 per ton.) The company estimates it will sell 80,000 TerraPasses this year; its $923,000 possible investment thus represents anywhere from one-seventh to three-eighths of its potential 2008 revenue.
Nevertheless, TerraPass is working on ways to get the word out. Customers have primarily found TerraPass directly through its website. But during the summer, Ford Motor and Expedia agreed to offer TerraPasses to their customers, and in October, three major car-rental chains, Enterprise Rent-a-Car, National Car Rental, and Alamo Rent-a-Car, said they would offer TerraPass offsets to customers in the U.S. and Europe. The rental-car program, which begins on January 1, allows drivers to pay $1.25 per rental to offset emissions associated with the cars they rent.
"At the end of the day, I'm an environmentalist," says Arnold. "But I'm also a capitalist. Putting those two together is very satisfying."Visit Portfolio.com for the latest business news and opinion, executive profiles and careers. Portfolio.com© 2007 Condé Nast Inc. All rights reserved.