ONDON During negotiations over the Kyoto Protocol,
the United States preached the importance of market solutions
to reduce greenhouse gas emissions. Few countries listened.
Now, with the Americans no longer at the table, the former
free-market opposition has taken over the pulpit. Canada
ratified the treaty in December, meaning the plan to reduce
greenhouse gases is just one nation shy of becoming law in
more than 100 countries. And the heart of the treaty is an
emissions-trading plan that closely resembles what the United
States originally proposed.
"When Bush pulled out in the cavalier way he did, he
galvanized everyone around the world to make it work," said
David Doniger, a former Kyoto treaty negotiator under
President Bill Clinton and now policy director of the Climate
Center at the Natural Resources Defense Council. "The system
is made in America, and the Americans aren't part of it."
Other countries see opportunity in America's retreat.
"Now that the Americans are out, Europe can dominate the
emissions trading market," says Steve Drummond, managing
director of a greenhouse gas brokerage in London called
CO2e.com. "It entitles the Europeans to write the rules for
And Europe has indeed been busy writing. Britain introduced
the world's first organized trading system two years ago.
Denmark has begun a smaller plan, and in December the European
Union issued plans to begin full-scale trading in 2005. With
Kyoto shaping a multibillion-dollar commodities exchange,
companies are already trading emissions reductions, which are
expected to become increasingly valuable as other companies
enter the market.
The idea behind what are called cap-and-trade arrangements
is to issue a limited number of pollution permits and then
allow companies to buy and sell them. Whoever can reduce
emissions cheaply can sell unused permits to others, making
creative ideas for pollution reduction a profit opportunity.
As overall reductions are realized, governments can slowly
reduce the number of outstanding permits to keep both the
price of permits and interest in further reductions high.
It is hard to quantify the benefit or loss to American
businesses for not being part of the global market. Certainly,
heavy polluters are better off because they do not have to buy
pollution permits or invest in new technology. Companies that
could achieve low-cost reductions, however, cannot realize the
profits by making those reductions, and the market
infrastructure of brokers and trading experience is developing
American multinational corporations are also forced to put
in place two ways of accounting for carbon dioxide emissions,
one for emissions inside the United States and one for
emissions in nations that signed on to Kyoto. And with various
proposals before Congress to regulate greenhouse gas
emissions, companies contemplating equipment upgradings in
their American plants are unsure what kind of regulatory
environment they face.
So far, regulation is strictly self-imposed. Trading at the
Chicago Climate Exchange, a market based on voluntary
compliance, is set to begin in June. The chairman and chief
executive of the exchange, Richard Sandor, says that even
voluntary markets can allow the United States to be
competitive internationally. "This will squarely put the U.S.
in a very good position to lead efforts in developing
market-based solutions to environmental problems," he said.
"Carbon is only the beginning."
Outside experts are not as hopeful for voluntary measures.
"Mandatory programs can force behavior from inefficient
firms," says Thomas P. Lyon, a visiting fellow at Resources
for the Future, a Washington research center. "A voluntary
program simply can't touch those."
One reason companies are involved with the climate exchange
is to prepare for mandatory requirements they foresee. "It's
an insurance policy," said Bruce Braine, vice president for
strategic planning and analysis at American Electric Power,
the nation's largest power generator and biggest emitter of
carbon dioxide. "If you ultimately have mandatory
requirements, then this gives us first-mover advantages."
So far, the right to emit an estimated 200 million tons of
greenhouse gases has changed hands, and trading volumes are
growing rapidly. According to Natsource, a large environmental
gas brokerage firm, volumes last year matched the volume for
the previous five years. Most of the volume is driven by the
desire to get low prices on emissions reductions that companies
expect will be valid under the Kyoto agreement.
The right to emit the equivalent of one metric ton of carbon
dioxide now sells for $3 to $8, said Jack D. Cogen, chief
executive of Natsource. When Kyoto takes effect in those countries
that have ratified it Russia, for one, is still to act
that price is expected to rise sharply. Estimates for the
size of the greenhouse gas market vary widely, but everyone
agrees it will be a major commodities market. "Every time
you burn fossil fuels you create carbon," Mr. Sandor of the
climate exchange said. "This market could be as big as the
The Dutch government is now one of the largest buyers on
the market. Canadian corporations, which had been buying large
volumes of American emissions reductions in recent years,
have scaled back since it became clear the American reductions
would not be compliant with Kyoto.
Brokers are still waiting for precise Kyoto rules to be published,
which will allow trading to develop similar to that for stocks
and bonds. For now, each deal is based on an estimate about
whether the reductions will comply. "It's like selling real
estate," said Frank Joshua, managing director of Natsource
Tullett (Europe) Ltd.
Today at CO2e.com, a subsidiary of Cantor Fitzgerald, just
a few employees sit in offices next to Cantor's trading floor,
where billions of dollars of bonds change hands daily. Mr.
Drummond of CO2e.com looks forward to the day when his brokers
join the brokers working the bond market a few feet from his
desk. "The emissions market closely resembles the bond market,"
he said. "This is a serious business opportunity."
The idea of trading pollution credits first came up in a
significant way in the Clean Air Act of 1990. It was intended
to reduce pollutants responsible for acid rain and was signed
into law by President George H. W. Bush.
The Clean Air Act reduced dangerous pollutants like sulphur
dioxide for a fraction of what it had cost before. The Environmental
Protection Agency estimates that for a cost of $1 billion,
the legislation has saved the United States at least $50 billion
in health costs alone.
By not putting in place similar legislation for greenhouse
gases, critics fear, the United States allows other countries
to gain experience and win business in the field. "All we're
doing now is giving other countries a chance for remedial
education," said Mr. Doniger of the Natural Resources Defense
Council, "and it will cost us in the end."