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A Free Market Cure For Global Warming

Science & Technology: Environment

A Free-Market Cure for Global Warming

Trading emissions could cut the cost of cleaning up

Reid Smith took it as a personal challenge when BP-Amoco PLC CEO Sir John Browne ordered his giant corporation to cut emissions of carbon dioxide and other so-called greenhouse gases, which contribute to global warming. A Houston-based environmental team leader in BP's Western Gas business unit, Smith quickly spotted an opportunity--the thousands of valves that shunt fluids from the company's network of wells. Each valve emitted small whiffs of methane, a potent greenhouse gas.

So Smith's team installed 4,000 new valves that don't leak. Now, Western Gas's greenhouse emissions have been slashed by the equivalent of 1.4 million metric tons of carbon dioxide yearly. In addition, the unit is selling 1,820 million cubic feet worth of once-wasted gas per day--enough to pay for the new valves within three years. But Western Gas got a more unusual bonus as well. The project cut emissions more than required by BP's internal targets. And thanks to an innovative companywide emissions-trading scheme that was launched in January, Western Gas was able to sell 40,000 tons of extra emissions to other BP units that couldn't make cuts as cheaply, boosting its bottom line and saving money for the whole corporation. "It's a free-market system that appears to be working quite well," says Smith.

The U.S. Congress, clinging to a thread of scientific uncertainty, may still doubt that the earth is being warmed by greenhouse gases spewing from power plants, factories, and automobiles. But companies around the world figure that international rules and curbs on emissions are essentially inevitable. So their main concerns have now shifted to designing schemes to reduce emissions as inexpensively as possible. And with experiments like BP's emissions-trading program pointing the way, there's a growing consensus that the best approach is to create a free market, and leave the details to the fabled invisible hand. "What BP is doing is great for them and great for the rest of the world," says Dale E. Heydlauff, vice-president for environmental affairs at American Electric Power Co., a major U.S. utility. "They're showing that an emissions-trading system can work."

BP isn't the only pioneer. Royal Dutch/Shell Group has a similar internal trading scheme, and others are in the planning stages. On a larger scale, both Britain and Denmark plan to set up emissions-trading markets. Some European Union staffers are pushing a Europe-wide scheme. "To reduce CO2 emissions abroad may be cheaper than at home," said Dutch Environment Minister Jan Pronk in an April speech. In January, the World Bank launched a $150 million "venture capital" fund, with companies and governments chipping in to pay for projects that can cut emissions--and divvying up shares of whatever reductions are achieved.SIMPLE PLAN. In fact, trades are already taking place between companies. Last fall, Ontario Power Generation Inc. bought emissions reductions from Zahren Alternative Power Corp. in Connecticut. New Jersey is talking about trading with the Netherlands. And financial operations like the Sydney Futures Exchange are rushing to act as brokers. "Emissions trading is an idea whose time has come," says Richard L. Sandor, chairman of Environmental Financial Products LLC in Chicago.

The basic idea is simple. To lessen the chances that earth will heat up, the world needs to trim the buildup in the atmosphere of gases that trap the sun's heat. One approach would be to order every country and company to cut emissions by a set amount. But that would be unfair and costly to those who already have trimmed emissions. Another tack, being explored by several European countries, is to slap taxes on carbon fuels, creating incentives to be more energy-efficient. But such taxes are political suicide in the U.S., the world's largest emitter of greenhouse gases. Besides, if a tax had been imposed, it just would have been added to the cost of operations, says Simon Worthington, manager of the company's trading program.

The best alternative, most economists agree, is to impose an overall cap on emissions but maintain flexibility with a credits-trading system. BP is doing that internally. Each of its 127 business units has 10 years to cut emissions by 10% below 1990 levels--roughly a 40% cut from business-as-usual projections. Trading enables cuts to be made at the lowest possible price, since units with higher mitigation costs can buy emissions from others elsewhere in the world.

Similarly, in the World Bank carbon fund, investors such as Deutsche Bank and Mitsubishi will get credit for projects like a high-tech methane-capturing landfill in Latvia. Global warming is a planet-wide problem, "so it doesn't matter whether the reductions come from Cincinnati or Cairo," explains Judith Bayer, director of environmental affairs at United Technologies Corp. "You want to look for the most cost-effective reductions, wherever they are."

This general approach has proved itself in another realm, where it has worked spectacularly--the U.S. effort to sweeten acid rain. Burning coal, particularly in big electric-generating plants, produces sulfur dioxide, the main culprit causing acid rain. In 1990, Congress told the Environmental Protection Agency to clamp a lid on sulfur emissions from power plants. But the utilities were allowed to trade SO2 credits. Skeptical execs complained that the rules would be prohibitively expensive at as much as $1,000 per ton of sulfur dioxide eliminated. Today, the price is a mere $131 per ton--and utilities have cut more than was required. "Everything the academic economists predicted--lower costs and greater reductions--has been borne out," says Joseph Goffman of Environmental Defense, which helped develop the trading scheme.LATE ENTRY. During the climate negotiations in Kyoto in 1997, the U.S. team slipped the idea of emissions trading into the protocol at the last minute. The Europeans "thought it was just a big loophole that the U.S. came up with," notes UTC's Bayer. But now, Europe is lining up behind the idea--and the U.S. has become the biggest obstacle to an international accord. Given Congress' opposition to measures to reduce global warming, it's possible the U.S. could get left behind. "International emissions trading was an American idea," says Senator Joe Lieberman (D-Conn.), one of the few supporters of action on climate. "But if we keep on the current track, it seems to me that the train is going to leave the station without us."

Companies can't afford not to be on board, however. In anticipation of an international agreement, UTC, DuPont, BP-Amoco, and many others have committed to reduce emissions. "The private sector is the agent of change, not the government," says Eileen Claussen, president of Pew Center on Global Climate Change. And as the world learns that emissions trading can cut the price of taking action, experts expect the U.S. will sign on. "Once it becomes clear that the cost of doing this is quite small, the resistance here will be nowhere near as high," predicts Sandor.

Experts caution that huge hurdles still lie on the road to an international accord. But with the help of the invisible hand, it may prove possible to stave off the threat of global warming.By John Carey in WashingtonReturn to top

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