- The Washington Times - Sunday, April 15, 2007

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.

Critics say forcing U.S. manufacturers to pay for the right to release carbon would encourage businesses such as steel, automobile, chemicals and aluminum makers to relocate to China and other Third World countries that do not regulate carbon.

That already is happening in Europe. Arcelor Mittal, a European steel maker that is the world’s largest, has warned that Kyoto emissions limits may force it to close two factories, and says its reduced production will be replaced with Third World imports. Acernex, a Spanish steel producer, has moved its production overseas, and several aluminum factories closed because of skyrocketing electricity costs.

Power plants for the most part are not able to relocate, as their customers and distribution networks necessarily lie within U.S. borders. The cost of complying with the mandate would fall heavily on utilities and their customers, who would have to pay much higher rates for electricity to cover the cost of buying carbon permits or otherwise installing the technology needed to cut carbon emissions.

But some businesses would make big money under a carbon-trading system — and many of those businesses already are lined up in support of legislation in Congress. Farmers would be among the biggest beneficiaries because they can plant trees and manage their crops and agricultural land in a way that absorbs carbon from the atmosphere and makes them net carbon reducers eligible to sell permits.

“More and more farmers want to get on board because they see the potential of helping the environment, plus adding another source of farm income” through use of conservation tillage practices, said Dave Miller of the Iowa Farm Bureau Federation.

Wall Street firms such as Goldman Sachs & Co. — one of the principal proponents of carbon trading — also would profit, as they would carry out the day-to-day trading on the commodities exchanges where the trading systems would be administered, and would earn lucrative fees in the process.

Goldman Sachs in 2002 helped to establish a voluntary carbon-trading exchange called the “Chicago Climate Exchange” that businesses can join.

While most of the members are renewable or low-carbon energy companies, farmers and other green businesses that stand to gain from carbon curbs, the exchange has attracted a few big carbon-producing businesses, including Ford Motor Co., Dow Corning, Dupont, Eastman Kodak, American Electric Power, Safeway and Amtrak.

Businesses call for action

Some of the same companies last month joined other big-name businesses and environmental groups in calling for mandatory carbon caps and a carbon-trading system to avert global warming. Participants in the Climate Action Partnership include General Electric, Alcoa, BP America, Caterpillar Inc., Duke Energy, Dupont, FPL Group (the parent company of Florida Power & Light), Pacific Gas & Electric, and Lehman Brothers.

The companies contend that carbon regulation and trading is necessary and inevitable, and the U.S. must get moving if it is to be a leader rather than a follower in green technologies.

“Momentum is building among certain segments of corporate America for carbon caps, but, as always, the devil is in the details,” said Kipp Coddington, a lawyer at Alston & Bird. “What you are seeing is companies behaving as rational economic actors, as one would expect. Those who perceive an advantage in a carbon-constrained world are staking out their positions. Other firms are hedging their bets in case Congress takes action.”

While the Supreme Court decision and the ascendence of Democrats favoring action on climate change means that talk of carbon regulation will abound, Mr. Coddington said major obstacles to action remain.

One of the biggest is the objection by many political leaders to committing the United States to any regime that does not also rein in India and China, which this year may surpass the U.S. as the biggest producer of carbon emissions. President Bush recently cited China’s exemption from the Kyoto treaty in reiterating his decision not to impose mandatory carbon controls.

“We tend to discount predictions of imminent congressional action on climate change,” Mr. Coddington said. “Major emitters likely still have the luxury of sitting on the sidelines.”

A voluntary trading system has been established in Asia, where China, surprisingly, has emerged as a major contributor and beneficiary. The Asian Carbon Trade Exchange said Chinese companies have participated in about $2.4 billion of carbon-reducing projects with European and Japanese companies covered by the Kyoto treaty.

Critics call trading ‘disastrous’

Critics of carbon trading dismiss the recent uptick in interest in carbon trading as “rent-seeking” by businesses hoping to profit from inherently carbon-free activities such as farming, much of which would occur whether or not they got paid for lowering carbon emissions.

“President Eisenhower warned us in 1960 to be concerned about the military-industrial complex. [Today] we ought to be concerned about the newfound eco-industrial complex,” said Steve Milloy of the Free Enterprise Action Fund, which fights environmental activism in corporate boardrooms.

“CEOs that are teaming up with the greens on global warming are cutting their shareholders’ and our economy’s throats by … lobbying for global-warming regulation that will mean higher energy costs, reduced energy availability and hampered economic growth.”

Marlo Lewis of the Competitive Enterprise Institute says carbon regulation has had disastrous results in Europe, not only chasing out heavy manufacturing companies, but also imposing a botched and bureaucratic system on producers that would have made the Soviet Union’s central planners envious.

European Commission bureaucrats charged with allocating carbon credits among European countries have been raising hackles lately by tightening the carbon limits by as much as one-third for Eastern European countries such as Poland, where emissions and energy use is up dramatically because the economy is growing rapidly.

Open Europe, a conservative British think tank, says the European system is “an administrative nightmare” that has forced small plants such as hospital boiler rooms to employ staff to conduct monitoring and compliance activities while big oil companies have figured out ways to make money under the system.

Some U.S. companies argue that carbon regulation is needed if only to eliminate the uncertainty that businesses and investors face when planning for the future, particularly when they are mulling the costs of big carbon-producing facilities such as power plants that will be around for decades.

Conventional coal-burning power plants, which have been targeted by environmentalists for extinction, pose the biggest questions because it is doubtful they could ever past muster under a low-carbon regime.

The search for “regulatory certainty is naive,” Mr. Lewis said. “The only certainty is that regulatory costs will grow unpredictably.”

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