CARBON TRADING TO THE RESCUE

publication date: Jul 31, 2008

By Samantha Solomon

It is the hot topic green bloggers have titled “How to Save the Planet.” Since the start of the Kyoto Protocol in 2005, 137 countries including China, India and the European Union (EU), have worked to reduce carbon (CO2) emissions, the number one cause of global warming and climate change.

The Logistics
Carbon emissions trading is a governmental approach to reducing the amount of industrial carbon pollution released by individual nations. A government imposes an industry-wide limit (or cap) on the amount of CO2 that can be released in a year. Individual companies, especially carbon intensive factories and large utilities such as power plants, are then allotted a certain number of CO2 emission credits that they cannot exceed. According to the United Nations Framework Convention on Climate Change (UNFCCC), one credit or unit is equal to one metric tonne of carbon emissions or one Assigned Amount Unit (AAU). If a company cannot reduce emissions enough to stay under the allotted credits they may take alternative actions to reduce carbon impact, such as invest in projects that reduce emissions in developing countries.

Companies that need additional emission credits must buy or trade with companies that do not exhaust their allotted credits. Industries that exceed their allotted credits are subject to fines or sanctions at the discretion of the ruling government. In other words, the buyer pays to pollute while the seller reaps rewards for reducing its emissions. Sometimes called cap and trade, several of these systems have already been implemented in response to the Kyoto Protocol; the most successful being the European Union’s Emission Trading System (EU ETS).

A Case Study in Action
Beginning in 2005, the EU ETS required member countries to develop national plans, which resulted in CO2 reduction at facilities with high emission rates. Trading between nations was agreed upon with the intent to reduce overall emissions by 5.2 percent by 2008. However, problems have developed within the EU ETS that have forced the European Union (EU) to overhaul its system.

The new system forces industries in Europe to pay more for polluting by limiting the number of permits allocated by local governments. Currently, countries issue a large number of emissions permits for free, close to 90 percent.

Henrik Hasselknippe, the director of EU emissions trading analysis for Point Carbon, told the International Herald Tribune that polluting companies will have to buy almost all of their permits beginning in 2013. At that time, an EU-wide limit on the number of allowances will be imposed. And, the organization will be centrally headquartered in Brussels, which will eliminate the ability of local governments to distribute extra permits to companies trying to make a profit by selling off extra credits.

This new and improved system is not without its critics. There is a concern that by forcing companies to buy a large amount of their permit, they will not be able to compete with suppliers from countries that do not impose emissions restrictions. The possibility of a “carbon tax” on imports from non-complying countries is on the table, but according to the Tribune, a decision will be delayed at least until 2010.

How Low Can You Go?
Japan, another major player in the emissions market, announced in June that it can match or better European reduction levels over the next 12 years. In an official announcement, Prime Minister Yasuo Fukudo said Japan is willing to take difficult measures to set an example for others. Japan’s “Cool Earth Initiative” will strive to cut greenhouse gas emissions by 60 to 80 percent by 2050. Japan is currently struggling to meet the six percent reduction level set forth by the Kyoto Protocol, but Fukuda is optimistic that Japan will achieve a 14 percent reduction by 2020.

Reuters reported that Australia is in the midst of designing what will be “the world’s most extensive emissions regime” starting in 2010. Prime Minister Kevin Rudd was advised by government appointed economist Ross Garnaut to raise his current goal to cut greenhouse gas emissions by 60 percent by 2050. Gaurnet’s prospective scheme differs from EU ETS because it will cover more sectors of the economy.

Waiting to Take the Plunge
So where is the United States in all this? In 2005, the United States was the only participating country to not officially ratify the proposals set forth in the Kyoto Protocol. (Former Vice President Al Gore and Sen. Joe Lieberman symbolically signed it in 1998.) And while we have operated a highly successful cap and trade system to reduce emissions of sulphur dioxide (the cause of acid rain), no carbon emission plans have made it past the drawing board.

The current administration is wary of the serious effect a scheme might have on an already weakened economy. And, though several bills have been presented, none have made it through debates. The most current demise was the Lieberman-Warner Bill, which died in the Senate on June 6.

With the presidential election just months away, change is in the air. A study published in June by Massachusetts Institute of Technology has provided guidance and encouragement to policy makers. A key finding of the study, which focused on the life cycle of the EU ETS, was that every guideline did not require immediate implementation.

“Obviously, you’re better off having things all settled and worked out before it gets started,” said A. Denny Ellerman, a senior lecturer at MIT. “But, that certainly wasn’t the case in Europe, and yet a transparent and widely accepted price for CO2 emission allowances emerged rapidly, as did a functioning market and infrastructure to support it.”

Domestic Change Is in the Air
In a 5-4 decision in April 2007, the U.S. Supreme Court ruled that the Environmental Protection Agency (EPA) violated the Clean Air Act by refusing to regulate greenhouse gas emissions (Commonwealth of Massachusetts et al. v. Environmental Protection Agency et al.). The EPA declined to set standards for greenhouse gas emissions after it was petitioned in 1999 by the International Center for Technology Assessment and other groups.

Included in the EPA’s list of reasons for not doing so, as reported by The Washington Post, is its lack of authority to regulate greenhouse gases and “‘numerous areas of scientific uncertainty’ about the causes and effects of global warming.”

The High Court’s ruling has spurred the EPA into formally seeking public comment on its draft annual report — the Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2006 — which analyzes sources of greenhouse gas emissions. Once the comment period closes, in mid-November, the agency will submit the final inventory report to the Secretariat of the UNFCCC.

With both major party presidential candidates promising a climate change law if elected, international policy makers are anxiously waiting for November. At the G8 Summit in Toyako, Japan, leaders from the biggest economic industries around the world were “more focused on who wins in November than making policies,” according to The Star Online.

Anthony Sneed, director of operations for Asia Carbon Exchange told The Star, “The [United States] will play a big part in this and right now it appears the U.S. will have to wait till after the elections to make some kind of meaningful input because we have a lame-duck presidency.”

Local Level Leaders Set the Example
Change will not just come from the top, though. Municipalities and states have banded together to form regional emissions trading schemes. Most notably, the U.S Conference of Mayors met in Seattle in November 2007 to sign the U.S. Mayors Climate Protection Agreement. To date, more than 800 mayors around the country have signed the agreement, patterned after the Kyoto Protocol. Signers agree to meet or beat the targets of the Kyoto Protocol. They also work to promote state and federal legislation and programs to lower emission rates and establish an emission trading system similar to the Kyoto proposal.

The Chicago Climate Exchange (CCE) is a voluntary but legally binding trading system for individual corporations, municipalities and educational institutes. The CCE is based on individual baselines and allowances and its goal is a reduction of six percent by 2010.

The Western Climate Initiative includes states and provinces along the western rim of North America. It was developed by the governors of Arizona, California, New Mexico, Oregon and Washington and is scheduled to have a complete design plan by August 2009.

The Regional Greenhouse Gas Initiative encompasses Maryland, Delaware, New Jersey, New York, Rhode Island, Connecticut, Massachusetts, Vermont, New Hampshire and Maine. It is scheduled to begin in 2009.

A Matter of When
With constant green chatter, voluntary carbon trading proposals and court-mandated programs in the works, not to mention pressure from other Kyoto Protocol signers, a national carbon trading system seems inevitable. The main question is, when?