Trading Gas

Polluters Fight Global Warming—and Government Regulation—With a New Market in Emissions Credits

When the eighth-graders in Megan Garrison's earth sciences class at Manhattan's East Side Middle School held a bake sale in June, they didn't use the proceeds to buy school T-shirts or donate to AIDS research as they had in the past. Instead they spent $34 they collected from cookies and cakes to buy 10 tons of carbon-based-greenhouse-gas-emission-reduction credits.

The students at East Side were studying global warming when they decided to do their bit to block the discharge of the gases that cause it. The idea came from Fran Morrill, a parent who happens to be a broker in the decade-old but little-known arena of emissions trading.

The credits the class bought came from a reforestation project in Panama. The newly planted Panamanian trees are absorbing carbon dioxide from the atmosphere; that reduction in harmful gas has been translated into a saleable product called pollution "credits." A utility company could have bought the Panamanian foresters' credits and used them to offset its excessive emissions of carbon dioxide. But instead, Garrison's class retired them.

Megan Garrison's class bought credits for carbon dioxide absorption from a reforestation project in Panama.
photo: Annie Chia
Megan Garrison's class bought credits for carbon dioxide absorption from a reforestation project in Panama.

"I thought that our world was going to get hotter and hotter and there was nothing we could do about it," says Cliff Lasky, 14, one of Garrison's students. But when Lasky learned he could put his money where his concern was, he donated $3 to buy himself a ton—about what you'd get from burning a hundred gallons of gas in a car. It felt good. "Even though a ton isn't a lot—there's millions and millions of tons of carbon dioxide in the world—at least there's that one ton that won't get into the air."

According to a draft report commissioned by Congress and released in June by the U.S. Global Change Research Program, the kids have reason to be worried. Within the 21st century, the report states, "it is likely that the average warming over the U.S. will be about five to 10 degrees Fahrenheit, which is significantly higher than the global average estimate [4 degrees Fahrenheit]." In some not-too-distant summer, New York City will feel like Atlanta, Atlanta will feel like Houston, and Houston will feel like Panama.

Emissions trading dates back to 1990, when a set of amendments to the 1963 Clean Air Act essentially established a market for pollution. The aim was to force capitalism to work in concert with environmentalism by making it profitable for companies to reduce the amount they pollute. The first pollutant targeted was sulfur oxide, a major byproduct of coal-fired power plants, which when released into the atmosphere causes acid rain.

In the case of sulfur oxide, each year the Environmental Protection Agency sets limits, called allowances, that tell utilities and other companies how much pollution they can emit. At the end of the year, each company's emissions are totaled. Companies that come in under the EPA limit get credits for the difference; in the old days, companies that went over the limit were fined or shut down. But with emissions trading, "dirty" companies can buy credits from "clean" companies and use them to get out of the polluting red. The "dirty" companies stay out of trouble and the "clean" ones make a profit.

"Anyone who's had a kid and offered them an allowance instead of a scolding realizes it works," says Carlton Bartels, managing director of Cantor Fitzgerald's Environmental Brokerage Services. Cantor Fitzgerald, an institutional brokerage firm with $45 trillion passing through it a year, was the first brokerage house to get involved in emissions trading, in 1992. There are now about a dozen firms brokering emissions trades, Bartels says, with the market valued at about $1 billion annually.

Yet there is a big difference between sulfur-oxide emissions trading and greenhouse-gas emissions trading—the greenhouse-gas trades are strictly voluntary, since the government hasn't yet set any limits on carbon-gas emissions. In a rare twist, though, industry, utilities, and environmental groups are working ahead of regulations to forge a greenhouse-gas trading system.

The reason, of course, has plenty to do with self-interest. Environmentalists are desperate for any kind of action on global warming. And even as corporate interests continue their campaign to discredit the science of global warming and lobby to forestall any meaningful political action to prevent it, big business recognizes that forced cutbacks in emissions are inevitable. A 1997 United Nations agreement called the Kyoto Protocol has called for reductions in emissions around the world, and countries will have to devise new rules for businesses in order to comply. By getting in early, industry is hoping to help shape the way regulations are written.

"While everyone likes to think that industry doesn't care, in fact these people realize that we're living on the same planet," Bartels says. But they're also looking out for their own bottom lines, and "they recognize that it's important for them to create a system that is one they can live with."

While it is not yet in effect, the Kyoto Protocol calls for an average 5.2 percent worldwide reduction in greenhouse-gas emissions from 1990 levels by 2012. Thirty-eight industrialized countries are a party to the treaty. Under Kyoto, the U.S. would agree to cut its emissions 7 percent by 2012. (In 1997, with only 4.6 percent of the world's population, the U.S. was responsible for 24 percent of the carbon gas produced by burning fossil fuel.) The U.S. signed the Kyoto Protocol on November 12, 1998, but has yet to present it for ratification in the Senate, where it faces significant opposition.

Next Page »