Warming Trend Is Hatching a Business

By Steven Mufson
Washington Post Staff Writer
Thursday, September 28, 2006

U.S. governors, impatient with federal inaction on global warming, are taking matters into their own hands. The result could add impetus to an emerging industry.

California Gov. Arnold Schwarzenegger (R) yesterday signed legislation to cap greenhouse gas emissions. And seven Northeastern states, which together emit as much greenhouse gas as Germany, have banded together to set rules that would cut their emissions by 10 percent by 2019. Other states may join them.

"There isn't an actor at the table who wouldn't prefer a national program, but we can't afford to wait," says Franz Litz, climate change coordinator at the New York State Department of Environmental Conservation.

So the state leaders are modeling their efforts on the European Union, which has turned limits on greenhouse gas emissions into a multibillion-dollar worldwide industry.

Companies are already scrambling to take advantage of the E.U. system, which is an outgrowth of the global environmental accord known as the Kyoto Protocol. Arlington-based AES Corp. has dispatched teams to negotiate with Asian palm oil plantations over installing equipment to suck methane -- one of the most potent of a half-dozen greenhouse gases -- out of waste lagoons. The electric power company wants to convert it into energy and less harmful gases. In return, the firm would get credits it could use or sell in Europe.

The European system sets a cap for the continent's emissions of greenhouse gases, such as carbon dioxide. Every company producing significant amounts of greenhouse gases is issued a designated number of "allowances." If power plants and factories spew out more than their quotas, they have to buy allowances from firms that spew less than their allotments. Polluting companies can also buy credits from firms that are cutting emissions in the developing world.

The result: Gases that were once worthless now have a commercial value every bit as solid as coal, pork bellies or Treasury bills -- only with this commodity, companies are paid for what they do not deliver. According to Point Carbon, a research firm, $12.6 billion of greenhouse gas emission rights, called European Union Allowances, were traded in the first half of this year. The value of all existing allowances exceeds $70 billion.

The Northeastern U.S. governors' Regional Greenhouse Gas Initiative plans to begin a similar type of carbon trading by 2009. Schwarzenegger, who appeared last month beside British Prime Minister Tony Blair, said that linking a West Coast plan to Europe's was one option.

The idea of creating a market for trading air pollution rights began in the United States. Legislation passed in 1990 and implemented in 1995 established an acid rain program, which capped sulfur dioxide emissions and let companies trade their assigned shares. Sulfur dioxide emissions fell 30 percent. Economists say such plans meet environmental goals efficiently, without choosing between technologies.

The United States insisted that other countries adopt a cap-and-trade approach for greenhouse gases in the Kyoto accord but then never signed on while Europe moved ahead. Back then, the United States agreed to reach a target 7 percent below 1990 emissions by 2012. Now, the country is churning out 16 percent more than it did in 1990 and 25 percent more than either China or the E.U.

"It is ironic that 10 years after Kyoto was signed, there is a vibrant market in Europe, an emerging market in the developing world, and the U.S. is sitting on the sidelines," says Véronique Bugnion, Point Carbon's research director.

No one is on the sidelines in Europe. Power generators now count greenhouse gases -- measured in metric tons of carbon dioxide -- as one of their costs. "It's going to change the way you make decisions about deploying capital," says Garth Edward, trading manager for environmental products at Royal Dutch Shell PLC, which has 25 installations in the E.U. system. Energy efficiency projects, he said, "are going to move up the ladder faster."

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