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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.
"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 tonabout what you'd get from burning a hundred gallons of gas in a car. It felt good. "Even though a ton isn't a lotthere's millions and millions of tons of carbon dioxide in the worldat 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 tradingthe 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.
Domestically, the automotive and coal industries, and their considerable lobbies, are concerned that the Kyoto Protocol will cost them too much. Robert Byrd, Democratic senator from West Virginia, where waning coal interests still hold sway, cosponsored the Byrd-Hagel resolution in 1997 with Senator Chuck Hagel, a Nebraska Republican. The resolution declared that the U.S. should not become a party to any international treaty that imposes "serious harm" on U.S. companies or that does not hold developing countries responsible for their emissions, the second sticking point for opponents of the treaty. Under the protocol, only developed countries such as the U.S., Russia, Japan, and Germany have to reduce their emissions; developing countries such as Brazil, Uganda, and China would have no obligation to do so.
Another division exists between nations that favor unlimited greenhouse-gas-emissions trading (the U.S., Canada, Australia, Russia, New Zealand) and nations that want a restricted system (the European Union). The EU is more interested in using increased taxes to curb fuel use, and therefore emissions, as can be seen by comparing the price of a gallon of gas in the UK$4.60to that of one in the U.S.$1.66.
The fate of the protocol will in part depend on the U.S. elections. Al Gore favors the treaty, while George W. Bush, who claims he realizes global warming is a problem, opposes it. In the meantime, U.S. negotiators will continue to haggle over details during a UN session on the treaty to be held in the Hague this November. "There's just an incredible amount of work to be done," says Roger Ballentine, President Clinton's climate-change director. "Hopefully after [the November talks] the end will be in sight."
While there are still kinks to be worked out with the Kyoto Protocol, emissions trading is already having the effect of bringing all sides in the debate to the table. Bartels, for example, came to Cantor Fitzgerald from an environmental nonprofit background. "I've done more on this side [as an emissions broker] than I did in 10 years of arguing as a regulator at an NGO," he says.
Bartels predicts that relationships between environmentalists and various industrieslike agriculturewill change for the better as businesses realize there is money to be made by investing in the creation of emissions credits.
Among those who have changed their tune are hog farmers, Bartels says. Like cattle, hogs are major producers of methane, the second most significant human-influenced greenhouse gas after carbon dioxide. According to Bartels, it costs farmers only about 25 cents a ton to trap and store their hogs' gas emissions. The resulting credits sell for between $1 and $4 a ton, with profits ranging from 300 to 1500 percent.
Not everyone thinks emissions trading is the be-all and end-all solution to global climate change. "All we're doing is rearranging deck chairs on the Titanic," says Dr. Michael Molitor, associate director of the Center for Environmental Research and Training at the University of California, San Diego. Molitor would prefer that polluters invest in concrete, technological solutions that would actually reduce emissions in the first place.
Molitor sees another problem with treating pollution credits strictly as a commodity whose prices are set by world financial markets: That method doesn't take into account the wildly varying standards of living around the globe. "I like to call them luxury emissions," Molitor says, referring to a ton of American greenhouse gas, which might be generated by a utility producing power that keeps a 7-Eleven open 24 hours a day so people can buy giant bottles of soda around the clock. Compare this to Russia, Molitor says, where the economy is "going through the shitter," and a ton of emissions credits are more likely to be applied to a power plant that keeps people warm. He feels asking the same price for these emissions is unfair, if not immoral. "You're allowing Americans to continue to be hyperconsumers," he says.
To the business world, howeveras well as to some powerful environmental groups like Environmental Defensethe cost-effectiveness of emissions trading far outweighs such concerns. Giant oil companies and utilities are already actively trading among themselves in an effort to show that the system can work. These include BP Amoco, Shell, PG&E, and Ontario Power and Generation.
Another pioneering trader is the Calgary-based TransAlta Corporation, Canada's second largest investor-owned electric utility and its second largest polluter. "We've been in this game since 1996," says Paul Vickers, director of sustainable development for TransAlta. "We think we've got a pretty good idea of how the rules will play out, and of the risks."
Last year, the company was part of a consortium that bought credits from Iowa farmers who promised to till their soil in ways that restrict the release of carbon dioxide. More recently, TransAlta made a greenhouse-gas-emissions trade equal to 30 million tons over a 20-year period.
TransAlta bought those credits from Global Livestock Group, a Fairfax, Virginia- based company. GLG has devised a project to feed Ugandan cows a supplement that will increase the efficiency of their digestive systems, thereby reducing the amount of methane they release. According to Bernard J. Du Charme, business manager for the GLG, the levels of methane from cows with the feed supplement and without are known, and the reduced levels are translated into the emissions credits TransAlta has agreed to buy.
TransAlta has not disclosed how much it is spending for those credits in this or other deals, but it seems likely that by beginning to trade before an official market exists, it is acquiring its potential pollution rights at bargain rates. As TransAlta's Vickers says, inevitability is a strong market force. "Some kind of greenhouse gas regulations are coming," Vickers says. "Whether that's the Kyoto accord or the son or daughter of the Kyoto accord, the smart thing to do is get prepared before you're hit."