Market cooling

Will California and the West knock down global warming by buying and selling carbon?

 

Since the 1940s, the Collins family has brought tough environmental standards to its 94,000 acres of forestland around Lake Almanor in northeastern California. The family company avoids clear-cutting and concentrates on harvesting dead trees and overstocked stands where trees grow too thickly. The Almanor Forest is a far cry from other working forests — there are simply more trees left growing. In 1993, it became the first North American industrial forest certified by the international Forest Stewardship Council.

With climate change bearing down on the West and the world, forests like the Almanor may gain new value since well-managed forests suck up more greenhouse gases like carbon dioxide than stump-stubbled clear-cuts. “We think we’re going to play a role in solving global warming,” says Wade Mosby, vice president of the Collins Companies.

But exactly what that role will look like for forests and other carbon dioxide “sinks” remains uncertain, as Western states work on setting up a market-based system to reduce greenhouse gas emissions.

Market-based pollution-control systems, which allow polluters to buy and sell emissions allowances, have proven successful in the past; they’re credited with alleviating the acid rain problem in the Eastern United States. Western policymakers hope greenhouse gas exchanges, or “carbon markets,” will help reverse global warming more quickly and effectively than traditional regulation by allowing polluters to seek out the cheapest reductions.

“There’s no way on God’s green Earth you can get the reductions we need using (traditional) regulation,” says Winston Hickox, a former head of the California Environmental Protection Agency and chair of Gov. Arnold Schwarzenegger’s carbon market advisory committee.

Schwarzenegger, R, sees carbon markets as a significant means of reaching the aggressive greenhouse gas reduction targets he set last year. In late February, Oregon, Arizona, New Mexico and Washington agreed to join California and set up a regional carbon market by August 2008.

The West is following in the footsteps of others, including a European market, the Chicago Climate Exchange — a voluntary market among American corporations and government agencies — and the newly formed Regional Greenhouse Gas Initiative, which includes eight Eastern states.

But today’s effort to reduce global warming gases through market systems is far more ambitious than earlier market approaches. Previous systems included only polluters, those companies big and small that contributed to the problem being tackled. But greenhouse gas markets could allow polluters to buy into projects that offset their emissions — such as the Collins Companies’ Almanor Forest. And Europe’s experience with its first regulated carbon market offers a clear message for the Western states: Without a well-designed system, all the buying and selling of carbon emissions ultimately does nothing more than create an illusion that global warming is being solved.

 

Market-based systems for solving environmental problems have been in vogue in this country for more than two decades. They’re based on the premise that if polluters are allowed to buy and sell the right to pollute, they will find the cheapest way to cut pollution. The most successful of these programs, started in 1995, is used to combat acid rain in the Eastern U.S., a problem tied to sulfur dioxide and other pollutants from the region’s power plants. Each power producer is issued sulfur dioxide pollution allowances that steadily decrease over time. If a company reduces its emissions below the target with pollution-control devices or efficiency measures, it can sell any unused allowances, or save them for later years. A company that finds it too expensive to reduce pollution at its own plant can buy surplus allowances among the group. By 2005, the program had cut sulfur dioxide pollution 35 percent, at an estimated half the cost of simply enforcing reductions at individual power plants.

Carbon markets work in much the same way: Big polluters are issued allowances to emit carbon dioxide and other greenhouse gases, which they can then trade to find the cheapest way to meet national targets. Countries in the European Union set up the world’s first mandatory carbon market in 2005 to comply with the Kyoto treaty, which calls for a reduction of greenhouse gases to 8 percent below 1990 levels by 2012.

But the European market gave out too many allowances, and distributed them to power companies and other industries for free. Nothing deflates a market like offering too much of its main commodity for nothing. By early last year, the price of one ton of carbon emissions — the new unit of measurement in carbon markets — had sunk from close to $40 down to $10. With pollution allowances selling so cheaply, European polluters had little incentive to reduce their own individual emissions levels.

Under the European system, polluters can also earn greenhouse gas reduction credits by investing in projects in the developing world. In theory, it’s more cost-effective to cut emissions in places like China and Brazil than in highly industrialized Europe. But a report in Nature early this year found that about half of the money spent in the developing world did not go to phase out belching Chinese coal plants. Instead, it went to pay refrigeration- and air-conditioning manufacturers in Asia to stop emissions of obscure gases with higher contributions to global warming than carbon dioxide. The projects may have temporarily helped the world’s — and Europe’s — global warming balance sheet. But they did little to affect the more serious, systemic contributors to global warming — power plants and transportation. And they further fueled debate about what sort of offset projects should be allowed in a carbon market.

Despite all the carbon trading in the European system, now valued at $44 billion a year, the continent’s emissions continued to rise last year.