‘Cap-and-trade’ is all the buzz; it's worth $billions
This fall, Congress will tackle a bill to cap greenhouse gas emissions. Most likely trading carbon credits will be part of the plan, as an incentive to business.

Cap-and-trade, simply put, is a system whereby the government caps, or sets restrictions on, overall emissions and then issues allowances, or “credits,” to companies that emit greenhouse gases. Companies that have trouble reaching their target can buy more credits and up their allowance. Those able to come in under their target can sell their excess credits and make money. All this is done on a carbon market worth billions.

Cap-and-trade has a history of success here cutting sulfur dioxide, which causes acid rain. It’s also being used by the European Union to meet its Kyoto goals. EU distributes allowances to the individual countries that can then be traded among them through an exchange.

Under Kyoto, the United Nations runs a program called the Clean Development Mechanism, in which rich countries can get credits by investing in clean-tech projects in developing countries. A number of other cap-and-trade programs have been set up in recent years, in the Northeast for example. Western states are looking to do the same thing.

Trade vs. tax
There is money to be made in trading carbon credits and it’s much more palatable in a capitalistic society than a politically unpopular “carbon tax.” The tax, where emitters pay by the ton, would guarantee money to reinvest in clean energy. Cap-and-trade, however, guarantees reduced emissions. And it is a market approach that lets those who can cut back most easily and cheaply do so, at the least cost to the economy.

Cap-and-trade is more flexible, gives businesses some control, and can be linked to other systems around the world. The EU plans to link its market to the UN’s in November. South Korea expects to have a carbon market by the end of the year, Canada may introduce one, and a voluntary Australian plan just started up.

Allocations: free or auctioned
How the credits are allocated is the most complicated part of the equation, and the one that will be most difficult to negotiate. They can either be auctioned or given away free, or some combination of the two.

Quite likely an American system will involve a combination of free and auctioned credits, with more auctioned as time goes on. In an auction, proceeds go to fund new cleaner technology, efficiency and adaptation. That’s an idea that appeals to environmentalists and economists alike.

If they’re given free, there will be a tug-of-war over whether most of the credits should go to big polluters, who have to change the most at considerable cost, or to reward companies that have already made a shift to cleaner technologies and more efficiency. One reason so many corporations are advocating cap-and-trade is they want to have input into how credits are distributed.

Corporations, such as those in the U.S. Climate Action Partnership (USCAP), agree that emissions should be cut by 60-80% by 2050 and that cap-and-trade should be phased in. But they disagree vehemently about how to distribute the credits. Utilities with high-polluting coal plants, like Duke Energy, favor one tack, while those more reliant on cleaner natural gas and nuclear, like Florida Power and Light, favor the other.

Problems with the EU’s giveaway
Giving away all the credits can cause problems, if the European Union’s experience is any guide. The EU’s cap-and-trade system, set up three years ago to help its countries meet their 5-6% reductions under Kyoto, has not been very successful so far. In fact, overall emissions have increased 1-1½%. It turns out that some companies overestimated their baseline emissions so allowances were set too high. Another problem was that many utilities are charging their customers as if they’d had to pay for the credits and reaped windfall profits in the billions of dollars a year.

For Phase 2, beginning next year, EU plans to auction more of the credits, set the caps lower, and monitor companies more carefully. We can learn from their experience.

Big money involved
Carbon trading is rapidly becoming big finance, involving billions of dollars. Europe’s market is worth $24 billion. Voluntary markets, including the Chicago Climate Exchange, tripled last year and are worth nearly $100 million. NYMEX is now eyeing carbon trading. “Carbon will be the world’s biggest commodity market,” says Barclay Capital’s Louis Renshaw. Goldman Sachs and Morgan Stanley have rapidly expanded their carbon business, with MS setting up a carbon bank in August.

New York, which handled credits for acid rain, lost its lead when the U.S. pulled out of Kyoto. Now London has cornered the market, with more CO2 traded there than in any other city in the world. They not only trade allowances, but also invest in clean-energy projects that generate more credits.

Different approaches in Congress
A number of bills to curb greenhouse gases were introduced this spring and summer, most of them including cap-and-trade. The proposals will be debated long and hard before any agreement can be reached.
* Sanders-Boxer would permit but not required cap-and-trade. The EPA would determine allocations, with allowances geared toward those most affected by Global Warming and its policies.
* McCain-Lieberman says the EPA would determine allocations, considering consumer impact, competitiveness, and other factors.
* Kerry-Snowe lets the president and EPA decide about allocations.
* Feinstein-Carper says a steadily increasing amount would be auctioned, starting with 15% in 2011, up to 100% in 2036. It applies primarily to power plants and rewards gas, nuclear and more efficient coal plants.
* Bingaman-Specter says for the first 5 years the majority of credits would be free, with 24% auctioned, 9% going to states, 8% in incentives for carbon capture, 5% to agriculture, and 1% rewarding early actions.
* Lieberman-Warner, proposed at the end of the last session as a compromise bill, says most credits would be free, but in 2012 about one-fourth would be auctioned to those seeking additional discharge.
* Waxman, in the House, calls for the president to distribute allowances, with the Congress ratifying or modifying the plan. Any auction proceeds would fund a Climate Reinvestment Fund.

So you can see there are many variations to be sorted out, and you can bet there’ll be heavy lobbying by industry. But cap-and-trade advocates are starting to count their votes in Washington and say they are within reach of a veto-proof vote in the House and the 60 votes needed in the Senate.

Note: The idea of this president or EPA making the decisions about allocation is scary, given the amount of foot-dragging we’ve seen on anything environmental (they must not have any toenails left). Legislation will have to be very clear in its instructions and set parameters for whomever will make those decisions and be responsible for seeing they are carried out.
(Sources: Miami Herald, Pew Center for Global Climate Change, Greenwire, Reuters PlanetArk.com, The Guardian, NY Times)


News in brief

Federal park, forest managers not prepared for Global Warming
U.S. agencies responsible for managing parks, forests, oceans and monuments are not prepared to deal with climate change, a Government Accountability Office report revealed last week. Managers have neither the scientific information nor the guidance from above to include climate change in their decisions, though they were instructed by a 2001 law to do so, said the report. There is increased evidence of Global Warming on the 600 million acres of public lands and 150,000 square miles of public waters, from the disappearing glaciers at Glacier National Park to rising seas in the Florida Keys, the report said. (Source: Greenwire)

U.S. Forest Service disgruntled; is it going to pot?
Forest Service employees are upset and confused about their mission, as the increasing number wild fires takes more of their time and half of their budget. Employees, surveyed anonymously, said they spend too much time fighting fires and not enough managing forests. They also were unhappy with their political leadership in Washington. Meanwhile Agriculture Undersecretary Mark Rey has a clear idea of their main mission. “Illegal drug trafficking is the No. 1 priority,” he told a news conference in Fresno, saying Forest Service officials have declared war on pot farms in national forests. Ron Pugh, a Forest Service special agent, said the goal is to dismantle and disrupt “the widespread illegal occupation of national forests by armed foreign nationals” who grow marijuana. Last year more than 260 pot farms were found on public lands in California. (Sources: Greenwire, Land Letter)

‘Erin go hot’: Ireland getting warmer twice as fast as others
During the past three decades, Ireland’s temperature has risen twice as fast as the world average, that country’s EPA said last week. Temperatures have risen 0.76 degrees F per decade for the past 30 years, bringing more floods and heat waves. Six of the 10 hottest years in Ireland’s history have occurred since 1990. Over the next 20 years, rain is predicted to be stronger and more frequent, but after that, the country could become dryer, putting pressure on water supplies. (Source: Greenwire)

Heart attacks will increase because of Global Warming
An increase in global temperatures will likely cause more cardiovascular disease, several doctors at the European Society of Cardiologists annual meeting said last week. High temperatures can cause hardening of the heart’s arteries, said Johns Hopkins Chief of Cardiology Gordon Tomaselli. Another doctor reported that France had 15,000 more heart attacks than usual during the severe heat wave of 2003 that killed 35,000 in Europe. A Swedish doctor predicted more heart disease as temperatures rise a few degrees over the next 40 years. (Source: Greenwire)

APEC biz leaders call for carbon pricing, cite tipping point
Business leaders at the Asia Pacific Economic Cooperation meeting in Australia last week, called for their governments to put a price on carbon, saying businesses need an incentive to reduce emissions. “At the moment, you can pollute for nothing,” said Mark Johnson, who heads APEC’s Business Advisory Council. “Most of us believe we have reached a tipping point in science, and Global Warming is actually happening.” He also asked for governments to provide more incentives for investment in renewable energy sources. (Source: Greenwire)

APEC sets ‘aspirational' goal that will increase, not cut, GHG
Meanwhile, the APEC countries, were set to agree this weekend to a declaration including an “aspirational” target of cutting GHG emissions “intensity” 25% by 2030 and to yield to the United Nations as the proper framework for a post-Kyoto international agreement. “Intensity” is the operational word here, though. It ties GHG cuts to the growth of the economy and since the economy in Asia is likely to grow much more than 25%, there actually will be an increase in emissions, not a reduction. APEC also agreed wealthy countries have a greater responsibility to make reductions. (Sources: Greenwire, Agence France-Presse, BBC)


Xtreme weather watch

*This August was the hottest in the U.S. Southeast since records began in 1895. Average temperature was 82.3. The past few summers in the Southeast have been warmer than usual, with this summer in the top 10. (NY Times)

*A week-long heat wave in triple digits left 25 dead in Southern California last weekend. About 20,000 were without electricity. Temperatures rose to 111 in Simi Valley and 112 in parts of LA. Last year a two-week heat wave left 140 dead. (AP, NY Times)

*Category 5 Hurricane Felix struck land near the Nicaragua-Honduras border early last week, the first time in recorded history that two Category 5 storms made landfall in the same season. It was not far behind Dean, which hit Yucatan. Another record was broken when a second hurricane, Henrietta, hit Baha on the same day. (AP)


Take action

Don’t let this summer’s achievement in Washington die. Join the Union of Concerned Scientists in telling your Senators and Rep a new energy bill that emerges from Conference must contain 35 mpg fuel economy and a 15% renewable electricity standard. Go to http://ucsaction.org, scroll down and click on Hold Strong on Clean Energy Bill 9/7/07.

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Q&A

Reader Barb of Colorado asks: Is it true cattle cause as much Global Warming as gas and oil?
Earthling Angst answers: It’s true that livestock emit more greenhouse gas than automobiles. A report from the UN Food and Agriculture Organization says 65% of the nitrous oxide (a GHG) caused by human activity comes from livestock manure. And methane, a potent GHG, is emitted when they pass gas. The report recommends a change in diet to reduce the emissions. (Source: E&E News PM)