Companies Gear Up for Greenhouse Gas Limits

Goldman has also invested in a wind-farm developer; a solar photovoltaic cell maker; a wind turbine manufacturer; a cellulosic ethanol firm; and the Chicago Climate Exchange, where U.S. companies trade carbon credits on a voluntary basis.

In the insurance sector, where companies have taken heavy hits from hurricanes whose increasing frequency is blamed on global warming, many firms are coming up with new climate-change products, such as insurance against business or political risk for projects to reduce greenhouse-gas emissions in developing countries.

Europe's already functioning cap-and-trade system for greenhouse gases has been a catalyst for investment funds and financial service firms, creating an infrastructure for a future U.S. regulatory system. Natsource's advisory arm said earlier this month that the European greenhouse-gas market -- including traded allowances and credits -- totaled $30 billion last year.

An early entrant, EcoSecurities, was founded in 1997 by a Brazilian biologist and an American political economist. The Oxford, England, firm pioneered projects whose impact on greenhouse-gas emissions could be measured and sold to voluntary customers in industrialized nations. Today, it has more than 200 employees worldwide and has commitments to buy 150 million to 160 million tons of greenhouse gases through 2012 -- a little more than the annual emissions of Argentina -- to sell in Europe's nascent carbon market.

Credits like these help create an intricate financial infrastructure for the greenhouse-gas business. Insurance giant AIG, for example, last year provided a letter of credit that helped project developer Natsource buy seven years' worth of credits from two Chinese companies and resell the credits to 20 European firms. (Natsource manages a more than $600 million fund whose investors include Google co-founder Sergei Brin and energy firms in Europe, Japan and the United States.)

"It is becoming clear that the carbon-constrained economy has arrived and carbon regulation or climate-change regulation in the United States is clearly in the works," says Eron Bloomgarden, U.S. director for EcoSecurities. "That presents both opportunities and risks for companies. So companies that recognize those opportunities can capitalize on them, and those that don't will suffer."

Sometimes it's hard to gauge whether a company intends to cut greenhouse-gas output or to save energy costs.

In the steel industry, for example, energy makes up 20 percent of the cost of production, according to Andrew G. Sharkey III, president of the American Iron and Steel Institute, even though the amount of energy used by U.S. steel plants has dropped 40 percent over the past 25 years. Companies are still looking to cut energy use even further.

Reducing energy use "may not be driven by [concern about] greenhouse gases, but there are benefits on that side, as well," says Louis L. Schorsch, chief executive of Mittal Steel USA.

The next presidential election could add to the momentum for a cap-and-trade system. Republican candidate Sen. John McCain of Arizona and Democratic candidates have all said that the federal government must act to slow climate change.

That would be a reversal from the Bush administration's stance. "The position we've taken to date is that we're opposed" to a cap and trade system, said Clay Sell, deputy secretary of the Energy Department. "The view of our administration is that we have to think of the challenge of greenhouse gases in a global context."

That's shorthand for saying that the United States shouldn't adopt a system without the big developing economies, especially China and India. At the moment, the chances of doing that appear remote.

Even if congressional or White House action doesn't materialize, many U.S. companies could fall under cap-and-trade systems at home, as well as in Europe. The Regional Greenhouse Gas Initiative, a group of Northeastern states including Maryland, is planning to launch a cap-and-trade system in 2009.

The first auctions of allowances for producing carbon dioxide could be held even sooner. Véronique Bugnion, U.S. research director for the Oslo consulting firm Point Carbon, said companies with operations in states adopting the regional initiative will have to figure out how much to bid and how to finance purchases. Utilities, for example, will have to make bids before they are able to pass along costs to consumers.

"We're certainly assuming that demand for clean energy and energy efficiency is going to increase on account of concerns over climate change," said Whittaker of MissionPoint. "We have a sort of implicit assumption that there will be a cost of carbon in the United States, and we fully expect there to be a cap-and-trade system at some point."