Trading in Greenhouse Gases

Even without US participation, the Kyoto Protocol to reduce greenhouse gas emissions will alter how the world does business. Take, for example, the likely boom in one of the treaty's market-oriented approaches: emissions trading.

Such trading, a long-used tool in the US for cleaning the environment, lets businesses sell credits if they produce less of a pollutant than allowed under a cap set by regulators. The buyers are firms that exceed the cap.

Over time, the incentives to clean up operations grow, and pollution recedes. Witness the substantial reduction in the US over the past decade of sulphur dioxide pollution, which causes acid rain, thanks largely to an effective emissions-trading scheme.

Anything that increases such activity is welcome. The Kyoto agreement, expected to take effect early next year after some final ratifications, will do just that. Companies – as well as cities and countries – will get a new set of incentives to become involved in buying and selling pollution credits.

Kyoto mandates a reduction in greenhouse emissions by developed countries who've agreed to the treaty. Those countries must force factories, power plants, vehicle producers, and other sources to make the reductions.

Anticipating this, Britain and Denmark have already introduced trading in greenhouse gases – including the chief offender, carbon dioxide. It is likely to spread in Europe as the European Union completes its regulatory scheme for CO2 reduction in the next few years. Canada (not yet a Kyoto ratifier) also is planning to start a trading system.

Even the US, the leading greenhouse gas emitter and on the sidelines of Kyoto, will see action on the pollution trading floor through private initiatives. Nearly 30 large US firms have joined to form the Chicago Climate Exchange. The companies, including giants like Ford and DuPont, will set pollution caps among themselves and then use the exchange (scheduled to open early next year) to set prices on greenhouse emissions and handle trades between overpolluters and "underpolluters."

On another front, the World Bank has established a Prototype Carbon Fund. It gives credits to companies that help developing countries shift to technology that reduces CO2 emissions. Under Kyoto, similar credits can accrue to any company, or country, that contributes to greenhouse-gas reductions around the globe. For example, credits would go to a government or a company that funded wind-energy "farms" in places that had relied on coal-burning for electricity.

The credits would be valid, tradable, financial instruments.

These transactions still are in their early stages, but the World Bank foresees a $10 billion market in greenhouse emissions by 2006. Businesses will get involved regardless of their government's stance on Kyoto, and the benefits will reach far beyond corporate bottom lines.

Emissions trading, which spurs investment in cleaner energy sources, could be one way to convince more Americans that a global effort to slow the growth of greenhouse gases is an effort worth joining.