- The Washington Times - Sunday, May 21, 2006

LONDON

It had been billed as Europe’s solution to reducing the impact that business and industry have on the environment. The system for trading carbon credits is the centerpiece of Europe’s efforts to tackle climate change, but last week the market collapsed when it emerged that far more carbon credits existed than had been thought.

Governments across the European Union now are forced to confront difficult questions about whether the artificial market they set up will have the desired effect of helping them meet the emission reduction targets agreed at the Kyoto summit on climate change.

The Kyoto agreement obliges nearly 40 industrial nations to cut emissions of heat-trapping gases by at least 5 percent from 1990 levels during the 2008-12 period. Because most of those gases are emitted by industry, a plan was devised to give each company a quota for the amount of gases, such as carbon dioxide, it could release. Any emissions above that level would have to be purchased using a credit from someone with surplus allowances to sell.

That created a market in carbon credits overnight. Banks and advisers such as KPMG and Ernst & Young stepped up to put vendors with excess quotas in touch with polluters. Entrepreneurs soon realized that huge amounts of money could be made by trading in carbon credits created by setting up carbon-emission reduction quotas, mainly in developing economies.

The potential has led to many companies listing on the London Stock Exchange’s Alternative Investment Market in recent months.

Climate Exchange, for example, has bought stakes in the Chicago Climate Exchange and the European Climate Exchange, as well as stakes in businesses building biofuel plants and developing fuel-cell technology. The company said in September that its assets were worth about $1.78 per share. Its shares today are worth about $5.16.

Agcert’s volatile shares, meanwhile, have plunged by almost a third, but still value the Dublin-based company at nearly $595 million. It recorded a loss of $23.1 million last year and had no revenues, but says it will become cash-flow-positive this year and strongly profitable next.

Farming emissions

Bill Haskell, Agcert’s chief executive, said the company’s business is installing enclosed storage and gas-capture facilities for animal manure at intensive farming operations in South America. The methane produced by agriculture accounts for 20 percent of carbon gas emissions, and methane is 20 times more damaging than carbon dioxide for the environment.

“The goal of Kyoto was to reduce the 20 billion tons of carbon gases released each year by 5 percent or 1 billion tons,” Mr. Haskell said. “That has now risen to 1.4 billion tons, and all that could be achieved by controlling emissions from agriculture.”

The company has 450 methane-capture facilities installed and already has been selling carbon credits. Mr. Haskell argues that last week’s price crash in carbon credits was nothing more than “teething trouble” for a market in its first full year of operation.

“Governments made liberal estimates of how much carbon they would emit and made it pretty easy to hit their targets. For phase two, which starts next year, they have got real measurements and the caps will be a lot lower,” he said.

In the United Kingdom, the government set up the Carbon Trust to advise on cutting carbon emissions and to support the development of low-carbon technologies.

Where to set limits

Michael Grubb, the Carbon Trust’s chief economist, noted several difficulties with how the European credits trading system is operating.

“The idea of setting caps on emissions from companies, allowing them to trade across Europe so they can find wherever emissions abatement is cheapest — all that economic theory is perfectly good, and in that sense the system is a sensible one,” he said. “But the big problem is what level you set the caps at. How do you go about it?”

He said the process is subject to strong lobbying and government nervousness. “I think the real problem is that setting caps based on projections has got really fundamental problems.”

Mr. Grubb said companies have an incentive to overestimate their emissions to make their targets easy to beat, and that if the caps are set on past emissions, companies have no incentive to cut them because they will be rewarded with an even lower target for the next year.

“There are ways around these problems,” he said, “but they require governments to have some guts and be willing to set standards across industries, which means that some companies will be significantly short of allowances.”

He said that governments instead should hold auctions for permits to emit carbon gases. The United Kingdom’s market alone is worth about $12.75 billion. Across the European Union, the credits are this year worth about $63.75 billion. The revenue raised could then be spent on environmental projects overseas.

‘Carbon neutral’ bank

One company that is bypassing the carbon credits market is HSBC, the world’s third largest bank. It declared itself “carbon neutral” this year, after a program of cutting emissions, buying energy from clean sources and offsetting the remainder.

John Williams, the bank’s head of group sustainability, said HSBC produces about 700,000 tons of carbon dioxide each year, mainly from its buildings and by travel.

“We cut our emissions by about 20 percent to 30 percent, but to offset the remainder we went out to tender on 117 carbon-reduction projects,” he said. “They had to be environmentally friendly and cost-effective, and the method had to be robust and credible.”

In the end, the bank short-listed four projects, including a wind farm in New Zealand, an Australian composting project and bioenergy plants in India and Germany in which it decided to invest.

“This is a work in progress for HSBC,” Mr. Williams said. “When we talk about our carbon neutrality going forward, we will speak much more about working with our clients. We can use our core lending function to invest in offset schemes. Our project-finance business is already generating carbon credits.”

Executives at less “green” companies will have to wait until this summer to hear what the European Union has decided.

With an excess 44 million tons in carbon allowances last year, Brussels is coming under pressure to ensure that the scheme works more effectively in its next phase — from 2008 to 2012 — and is calling on governments to reduce their allocation of permits by an average 6 percent.


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