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Businesses Rewarded To Minimize Carbon Dioxide Output

By BRAD FOSS

AP Business Writer

Environmentalists always said there would be a price to pay for all the carbon dioxide being spewed into the atmosphere. Well, now there is.

While prized resources such as oil, gold and wheat have been traded for decades, there is a budding market for one of the industrialized world's abundant but unwanted byproducts: carbon dioxide, a gas produced when fossil fuels are burned and which many scientists believe causes global warming.

If it succeeds, the new market for carbon emissions will reward businesses that minimize their output of this ``greenhouse' gas. It will also benefit the environment and thereby prove, advocates say, that making green and being green are compatible goals.

``It's a sign of things to come,' said Luis Martinez, an attorney at the Natural Resources Defense Council in New York.

The only mandatory carbon emissions trading program is in Europe. It was created in conjunction with an international treaty on climate change _ the Kyoto Protocol _ that goes into effect Feb. 16 and caps the amount of carbon dioxide that power plants and fuel-intensive manufacturers in more than two dozen countries are allowed to emit.

A similar program is scheduled to begin in 2008 in Canada, which also signed Kyoto.

By contrast, the United States, one of the few industrialized countries that did not ratify Kyoto, is many years away from compulsory trading or nationwide caps on carbon dioxide, concepts that are strongly opposed by industry and the Bush administration.

However, nine Eastern states are developing a regional cap-and-trade program that will require large power plants from Maine to Delaware to reduce their carbon emissions and California is attempting to place greenhouse gas limits on automakers. Separately, a small group of companies has voluntarily agreed to cap their carbon emissions in the United States as part of an experimental market that is based in Chicago.

``We believe that at some point in the United States there will be mandatory legislation,' said Bruce Braine, vice president of strategic policy analysis at American Electric Power Co., a large power producer and one of the founding members of the Chicago Climate Exchange, or CCX. Other members include chemicals giant DuPont Co., computer manufacturer IBM Corp. and electronics maker Motorola Inc.

Under the European Union's Emissions Trading Scheme, some 12,000 industrial plants will be granted a limited number of emissions allowances, or credits, equaling the amount of carbon dioxide they are allowed to emit. Companies that exceed their limits must purchase credits to cover the difference, while those that produce less carbon dioxide than they are legally permitted can sell surplus credits for a profit.

By giving the private sector a financial incentive to make their operations more environmentally friendly, proponents believe the market-based approach will accelerate investment in emissions-reduction equipment, create positive reinforcement from investors and spur technological innovation.

``We're confident that once people get used to managing carbon in their businesses it will be successful,' said David Hone, climate change adviser at Royal Dutch/Shell Group, which has 46 facilities across Europe that will be regulated under the cap-and-trade system.

Hone said his optimism is based in part on the success of the cap-and-trade system the United States designed more than a decade ago to reduce sulfur dioxide emissions, which cause acid rain. The U.S. sulfur dioxide market, on which the EU's carbon market is based, is widely praised for accelerating emissions reductions at a lower cost than originally anticipated by industry.

But environmentalists and executives said there is much more at stake when it comes to carbon dioxide emissions, both in terms of the ecological benefits and the potential costs to industry.

``Carbon is the mother of all environmental commodities,' said Richard Sandor, who helped design the U.S. exchange for sulfur dioxide and is now the chairman of CCX.

The first phase of the EU trading program runs from 2005 through 2007 and the caps will be lowered from one year to the next. While detailed plant-by-plant limits are still being finalized, participants estimate that EU-wide industrial emissions will drop as much as 5 percent by 2008.

The cost to European industry over the next three years is estimated to be a few billion dollars, based on current market prices for carbon dioxide of about 7 euros per ton, according to Ilex Energy Consulting of Oxford, England. Of course, companies with surplus allowances stand to profit an equal amount.

``Frankly, a lot of companies will be hoping that the emissions price is low so they face lower penalties from having to go out and buy allowances,' said Andrew Nind, principal consultant at Ilex.
``The main concern of environmentalists is that the governments have been too generous in how many allowances they've given out,' Nind said. The lower the price, the less incentive there is to invest in equipment that reduces emissions, he said.

The second phase of the program runs from 2008 through 2012, by which time the European Union must lower its carbon emissions to 8 percent below 1990 levels. Canada must cut its emissions by 6 percent to comply with the Kyoto treaty.

In the United States, carbon-intensive industries successfully lobbied against Kyoto by refuting the threat of global warming itself, and by arguing that the treaty would hurt the global competitiveness of American companies and cause electricity prices to rise.

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