US bubbly over carbon trade

At The Hague climate conference this week, some envision a $500 billion market. Others see flaws.

Move over pork bellies; make way for carbon dioxide.

The gas that puts fizz in soft drinks and helps warm the climate is becoming a hot commodity for a growing number of companies worldwide.

Carbon-dioxide emissions are likely to be restricted with or without an agreement when two weeks of climate talks wrap up here this week on how to implement the 1997 Kyoto Protocols, many analysts say. Even if the protocols aren't adopted, countries including the United States are still bound by the 1992 Framework Convention on Climate Change to reduce emissions to 1990 levels.

One way to achieve those cuts, advocates argue, is to use emissions trading to trim the amount of carbon dioxide economies pump into the atmosphere.

By some accounts, the potential market for carbon dioxide is enormous. In the US alone, estimates range from $100 billion to $500 billion.

"This could become one of the biggest commodity markets in the world," says Richard Sandor, adjunct professor at Northwestern University's Kellogg Graduate School of Management in Evanston, Ill., and founder of the Chicago Climate Exchange.

The exchange is working to build a carbon-trading market in the upper Midwest. The concept, which has helped the US gain the upper hand in the battle against sulfur emissions, is simple, says Joseph Goffman, senior attorney for Environmental Defense, a New York-based group. "For some pollutants, the air doesn't care where reductions are made," he explains. "If you have three plants and you want nine tons of pollutants taken out of the air, let the plants figure out how to do it. They all could cut emissions by three tons. Or two companies could pay the third to do it all."

The currency in that deal is, in effect, a permit to pollute. The number of permits would be limited by the emissions target a country wants to reach each year. As the target gets smaller, so does the number of permits issued.

The only requirement for a company is that its emissions must match the permits on hand. If a company installs more-fuel-efficient boilers or energy-efficient lighting, for example, it could undershoot the emissions target, leaving it with excess permits. It could then sell them to companies having a harder time meeting goals. Or it could hang on to them in anticipation of a year when it might exceed targets or when it might face a drop in business.

This approach, Mr. Goffman says, yielded 100 percent compliance and emissions that fell 22 percent below federally set targets between 1995 and 1999 - the first phase of the US sulfur-dioxide emissions reduction effort.

Even kids can break into the market. Dr. Sandor describes a class of sixth-graders in Glens Falls, N.Y., who in 1997 were worried about what acid rain was doing to the forests of upstate New York. "The class collected $1,800, bid on emissions allowances at auction, and donated the allowances to the American Lung Association so they could never be used again," he says.

Yet for all its apparent success in the US, emissions trading has been one of the flash points for disagreements here over how to implement the Kyoto Protocols. The protocols, which would commit industrial countries to cut emissions by an average 5.2 percent between 2008 and 2012, allow nations to use emissions trading to augment other actions they take to cut greenhouse-gas emissions.

Some environmental groups, such as Greenpeace, argue that emissions trading represents a loophole through which industrial countries could drive a truck. By trading with Russia, whose economic collapse brought a parallel collapse in carbon-dioxide emissions, industrial countries could in effect buy their way toward meeting their initial Kyoto targets. The European Union, concerned about how a trading scheme could be implemented and enforced, has argued for a strict cap. The US, on the other hand, wants unlimited trading.

Caps on trading would boost the cost of compliance and "reduce incentives for innovation," says David Sandalow, US assistant secretary of State for Oceans and International Environmental and Scientific Affairs. "We do not have the luxury of wasting dollars, euros, and yen in the fight against climate change."

"We need to focus on the quality, not the quantity of trading," adds Sen. John Kerry, (D) of Massachusetts, here to observe the climate talks.

If that argument fails to wash with many political leaders here, it seems to have resonated with businesses. BP Amoco, for example, has instituted a carbon-emissions trading regime across its global network of facilities, according to Rachel Lewis, an environmental policy adviser with the petroleum giant.

In 1998, the company pledged to drop its greenhouse-gas emissions 10 percent below 1990 levels by 2010. Each of its 150 business units receives a target, she says. Managers are held as accountable for meeting those targets as they are for meeting financial targets.

Senator Kerry notes that during a dinner with the head of BP Amoco, the oil executive expressed amazement that, with emissions trading, the business units were meeting and even exceeding their interim targets faster and less expensively than anyone had projected.

Yet the US, as the single biggest source of carbon-dioxide emissions, needs to take the lead, according to Rafe Pomerance, one of the top US negotiators at the 1997 climate talks in Kyoto. "No matter what comes out of The Hague, the most crucial question is: What happens in the US? US domestic policy is a key trigger for global action."

Mr. Pomerance, who heads Americans for Equitable Climate Solutions in Washington, D.C., urges emissions trading with a unique twist: Instead of giving carbon-pollution allowances away, as the US government did with sulfur allowances, it should sell them to companies that import or extract fossil fuels. A quarter of the proceeds would go into a fund to help coal and oil towns adjust to the change. Each American would get a share of the balance.

Depending on the price of a ton of carbon, that could fatten the average wallet by $800, his group estimates.

(c) Copyright 2000. The Christian Science Publishing Society