Smokestack Lightning


As protesters outside global-warming talks in The Hague last month built sandbag dikes to protest the predicted rise in sea levels, a crowd of brokers, consultants, and engineers gathered across town for an old-fashioned launch party. was gearing up to capitalize on the emerging trillion-dollar market in greenhouse gases.

The online exchange, created by brokerage firm Cantor Fitzgerald and PriceWaterhouseCoopers, has a new take on the old model of trading the rights to pollute. For the past decade, companies have bought and sold pollution credits, which specify how many tons of acid-rain chemicals a smokestack can emit. Under that system, a relatively clean manufacturer can sell unused credits to a refinery that can’t meet its limits. Most of those transactions have occurred within the United States, and most have relied on brokers who ensure that buyer and seller operate in good faith. Now, the 170 countries behind the 1997 Kyoto Protocol are seeking to trade greenhouse gases as well, though negotiators have never been able to hammer out an agreement for how these international exchanges would work.

Yet companies, through brokers and business-to-business exchanges like CO2e, are jumping in early, trying to beat governments to the regulatory punch. An estimated 160 million tons of carbon dioxide have already changed hands through 60-plus trades offline. Companies expect to get credit for the moved tons under whatever international rules are eventually set down. In Canada, some government officials have talked to industrial players about getting credit for early action. “If you’re a buyer,” says one industry insider, “then you’re doing it to offset future regulatory requirements.”

Corporations have another motivation for taking the initiative: buy low, pollute high. Right now, companies can buy the credit to emit carbon dioxide for anywhere between $1 and $4 a ton. Natsource, a broker in carbon dioxide and other emissions, estimates that reductions now worth $600,000 could reach prices as high as $12 million in an official market.

“This means that the foxes are designing the henhouse. They’re going to know exactly where the loopholes are and where the back exits are.”

At the moment, however, there are no standards that define what a reduction actually is. Nor are there sanctioned—or, in most cases, even unsanctioned—third parties overseeing trades. Without a third party monitoring the transactions, verifying and tracking promised reductions can be difficult.

Typically, a broker handles the tricky issues that arise between buyers and sellers of carbon dioxide. Moreover, the broker can insure that the deal is legit. But outfits like CO2e are creating tech-based marketplaces where brokers recede into the background. “There’s no human involved,” says Walter Alcorn of GreenOnline, a company that sells software to facilitate Web-based exchanges. “Trades are done automatically by computer.”

Direct exchanges, though efficient, raise questions of reliability, even when no money changes hands. During the presidential election, sites like and encouraged Green Party supporters in swing states to vote for Al Gore in exchange for Ralph Nader votes in states safely in the Democrat’s pocket. The ultimate goal was to raise the Green Party’s share of the popular vote to 5 percent, so it would qualify for federal matching funds in 2004. But state attorneys general—and Nader himself—rejected the concept of swapping ballots over the Internet, because the trades were impossible to verify. Someone looking to take out Nader votes could have pledged a single vote multiple times.

For now, proponents of greenhouse gas emissions trading do not seem particularly concerned about shams. “There’s a great irony,” says CO2e chief Carlton Bartels. “Everybody is suspicious of the program. [But] my clients are spending millions of dollars. They’re not going to walk away with a promise. They want title. And if you don’t deliver, they want penalties.”

To others, a system that lacks a third party vetting the deal seems rife with potential problems. Luke Cole, general counsel at the San Francisco-based Center on Race, Poverty, and the Environment, says emission-trading programs “are shot through with fraud and very difficult to monitor and enforce.”

Companies involved in the premarket market hope the system and expertise they develop will be adopted by countries once the conditions of the Kyoto Protocol are finalized. “If we’re strict enough, and the government and environmental community comes and looks at our protocols, they’ll actually adopt them,” says Bartels. “You can’t write those things without experiments.” But some activists believe these experimenters are trying to set standards they like before governments can step in. “This means that the foxes are designing the henhouse,” says Cole. “They’re going to know exactly where the loopholes are and where the back exits are.”

Environmentalists and European negotiators in the Hague wrangled over capping emissions within individual countries. Already the world’s leader in greenhouse gas emissions, the United States wants to allow unlimited trading on an international exchange, so its industries can buy as many credits and spew as much pollution as they want. But under those rules, a country like Russia, where emissions are well below the requirements, would have little incentive to cut pollution, while America could continue fouling the air with yet more tons of carbon dioxide. Everyone in the States will be affected by this, but the real burden falls on the poor and disenfranchised. “We know [factories] are primarily in communities of color,” says Cole. “So now these communities would be responsible for not just their country’s, but the world’s pollution.”

The result of the online market for greenhouse gas emissions may well be that profit trumps public health and environmental concerns once again. Trading the right to pollute online is not the same as trading limited-edition Barbies on eBay. Nor is it the same as other business-to-business exchanges for industrial or corporate goods. The commodity here is public property—public health, the ozone layer, climatic stability. If the Kyoto Protocol is ratified by Congress—and that’s a stretch of the imagination—greenhouse gases may well grow to be the next megabucks market. But at what cost to the environment?

“In any market economy, you have winners and losers,” says Cole. “What you’re creating here is a whole other market scheme. And we know who the losers are going to be.”