Court ruling on greenhouse gases boosts ‘cap and trade’

A recent Supreme Court decision validating efforts to regulate greenhouse gases adds force to proposals in Congress to limit emissions from power plants and factories while allowing them to buy and sell the right to release gases into the atmosphere.

Such a “cap and trade” system has been established in Europe to help businesses comply with the Kyoto Protocol global-warming treaty. Though the Europeans are the first to attempt such a trading system, the idea originated in the United States and is modeled on a program for trading permits for sulfur dioxide and other power-plant pollutants on the Chicago Mercantile Exchange.

Fred Krupp, president of Environmental Defense and one of the originators of the trading idea, sees it as a creative way of spurring innovation and environmental responsibility among businesses, and rewarding those that find effective ways of removing carbon dioxide and other greenhouse gases from the atmosphere.

About 11,000 companies are participating in the European market, which Mr. Krupp said is working successfully to reduce emissions and create incentives for new low-carbon technologies.

“Without a comparable U.S. market to spur private investment in low-carbon fuels and equipment, our technology will certainly lag, and America will end up having to import the new green technologies, just as we now have to spend our national wealth to import and defend foreign oil,” he said.

While some environmentalists frown on the idea of “trading” the right to pollute, economists favor the system because it would encourage businesses to find inexpensive ways of eliminating carbon dioxide — such as through simple energy conservation — and do those first before pursuing more costly alternatives, such as designing and installing new technology to remove carbon from smokestacks.

The idea behind the trading system is to create a measurable cost for polluting the atmosphere, which then gives businesses an incentive to stop polluting. Spewing carbon dioxide, the principal greenhouse gas, into the atmosphere currently does not cost businesses or consumers, so few seek to minimize their emissions.

The system gradually increases the costs on businesses as Congress tightens the gas caps in an attempt to curb global warming. Over time, as all the easiest and cheapest ways of saving energy and reducing emissions are exhausted, the cost of obtaining a permit to release carbon rises and creates a bigger incentive for businesses to find technological breakthroughs that would minimize their carbon loads.

The market would function like any other commodity market, with licensed brokers who carry out the carbon trades, outside investors interested in potential innovators, and established rules of activity. According to analysts from the International Energy Agency, domestic and international emissions trading has the potential to reduce the costs of cutting carbon emissions by as much as 50 percent.

The idea of carbon trading has gained momentum as California and a group of Northeastern states recently enacted laws limiting carbon emissions and moving toward a trading system. Maryland in June is scheduled to join a trading system being set up by seven Northeastern states.

As more states move toward action, some of the targeted businesses have called for federal regulation rather than face multiple state systems of carbon regulation. Some companies have come to view regulation of carbon as inevitable because most other developed nations already are imposing limits required by the Kyoto global-warming treaty.

“Companies in California — and, indeed, elsewhere as well — should plan now on how best to respond,” said David Harrison Jr., senior vice president at NERA Economic Consulting, noting that companies that were ahead of the curve in Europe enjoyed a big advantage and made money under the system.

Winners and losers

The trading systems under consideration on both sides of Congress would create winners and losers among businesses — depending on whether they are heavy users of the fossil fuels that create carbon dioxide as a byproduct when they are burned.

Power plants and heavy manufacturers would be hit the hardest as they are the biggest users of coal, oil and natural gas.

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