Greenhouse Gases Heat Up as a Commodity
American companies have done little to reduce their greenhouse gas emissions in the years since the government failed to join with other nations in abiding by the Kyoto Protocol. However, despite the lack of government requirements, several dozen organizations are voluntarily helping us to breathe easier through the first North American marketplace for trading greenhouse emissions.
The Kyoto Protocol was established by the United Nation's Framework Convention on Climate Change in 1997; it set targets for 38 nations to reduce their emissions below 1990 levels. The plan allows for organizations within participating countries to buy and sell permits for emitting pollution, creating economic incentives to reduce greenhouse gas emissions.
President Bush has declined to sign the agreement, instead offering a less-stringent alternative.
Emissions trading enables companies to buy permits from those that have developed more cost-effective ways of lessening their environmental impact, according to Tim Brennan, professor of public policy and economics at the University of Maryland, Baltimore County. For example, a company that reduces its emissions by installing solar panels can sell permits to polluters at a premium. For many companies it is cheaper to purchase permits than to reduce emissions themselves, Brennan said.
"Emissions trading has been a very successful way of reducing the cost of pollution control," Brennan said. "It's not just some flaky idea."
In December of 2003, the first trades of greenhouse gas emissions in North America took place on the Chicago Climate Exchange (CCX). The exchange is run by volunteer member organizations that have agreed to take action against global warming. According to CCX vice president Rafael Marques, more than one million tons of carbon dioxide (CO2) have been traded on the exchange since its inception.
Professor Brennan said that including an emissions trading plan is the most politically palatable method for governments to introduce the reduction of emissions because "it means that it is being done most cost effectively." Emissions trading "lets the market figure out the best way to solve the problem," he said.
CCX now includes more than 50 member organizations including the City of Chicago, but so far only three power companies – American Electric Power of Columbus, Ohio; TECO Energy of Tampa, Florida; and Manitoba Hydro of Winnipeg – have joined.
Bruce Braine, vice president of strategic policy analysis for American Electric Power (AEP), expects more power companies to join once overall membership reaches critical mass. "It's kind of like a club. It becomes 'Why didn't you join?'"
Braine said AEP is has established a full-time position to manage its carbon sequestration effort, which includes tree planting. He said the company would be below its target for emissions in 2004.
Although the number of emissions permits traded per month on the exchange is growing, the price per ton is hovering just below $1, according to CCX. Braine said the price should rise closer to the $10 price of the European market as more companies come on board.
While the reduction in gases by CCX members constitutes only a fraction-of-a-fraction of the nearly two billion tons of greenhouse gases put into the air by the United States each year, Braine said that the perception of being a good corporate citizen will persuade more of the largest power companies to join. "We are moving the ball in the right direction," Braine said.
Braine said he does not expect the government to require greenhouse gas reductions anytime soon, so corporate emissions reductions will continue to be voluntary. "Our political system is such that we probably won't have a system in the next few years."
CCX does not have a formalized penalty structure for companies that exceed their greenhouse gas emissions, but Braine is "positive that every company has been meeting the requirements." Braine said there are mechanisms to verify adherence to the group's conditions. For example, the National Association of Securities Dealers audits each organization, he said.
The reduction of other harmful gases has been supported by emissions trading for more than a decade in the United States. The Environmental Protection Agency's Acid Rain Program trades in sulfur dioxide, and the EPA also coordinates 19 states' swapping of nitrogen oxides through the NOx Budget Trading Program.
The EPA's Climate Leaders program is another voluntary effort to reduce greenhouse gas production, but it does not include a trading program. The department encourages "aggressive long-term emissions reductions," and is working with 54 corporations.
Michael Cosgrove, CEO of energy brokerage Amerex, said that while some companies join out of environmental concern, others may join to get positive public relations or possibly to offset some prior negative publicity.
Cosgrove said some companies are being pressured by shareholders to act responsibly. Shareholders threaten to vote out boards that ignore the environment, he said. Consumers may also convince companies to begin reducing emissions. "For whatever reason, if Ford is a member and GM isn't (as is the case today) it may become a selling point to consumers."
Amerex joined a growing roster of companies that are becoming "carbon neutral," Cosgrove said Amerex purchased greenhouse gas permits through CCX to offset all of the energy used at its facilities and by its employees in travel. "By purchasing an allowance, you are sending money to someone who is doing something to address global warming," Cosgrove said.
Cosgrove believes that a change in leadership in the White House could result in corporations being required to reduce emissions, which would greatly expand the market and raise the price of permits. "I would assume that Kerry would be more friendly to Kyoto."