Market cooling

by Oakley Brooks

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.

As California and the West begin to set up their own carbon markets, Europe’s lessons are informing the work. “There were some design flaws and people are mindful of that,” says Dale Bryk, a senior attorney with the Natural Resources Defense Council, who is advising California’s market planners. “Basically, if you set the overall emission level high and don’t monitor it, you won’t have a robust market.” In addition to setting correct pollution limits, California will consider auctioning off pollution allowances to ensure a healthy starting price. The proceeds of the auction could be invested in clean energy projects or to help minimize the expected rise in electricity rates as utilities absorb the new costs of paying for carbon pollution.

California is also working to close another potential loophole by tying emissions in the utility industry to electricity sold in the state, as opposed to simply generated there; this will prevent utilities from jumping to other states without greenhouse gas caps to buy energy.

For the Western carbon market to work, states may also have to limit or restrict the participation of so-called offset projects, such as the Collins Companies’ forests.

The Chicago Climate Exchange, where 65 companies and local governments trade carbon emissions to accomplish modest reduction goals, is fairly lenient with offsets. Forest conservation and no-till farming projects (which leave carbon trapped in soil) are considered bona fide offsets, as are capturing methane gas from landfills and investments in renewable energy generation — wind, solar or small hydroelectric systems — in the developing world. The European market allows many of the same activities to offset emissions in the developing world, such as retrofitting industrial operations and converting power plants to renewable energy. But it does not allow forestry projects, because officials consider them too difficult to certify and monitor. The Northeastern U.S. carbon market will fall somewhere in between, allowing a wide range of offsets, but with strict limits: Offsets can only equal 3 percent of power companies’ overall emissions, and the projects — such as reforestation and methane gas capture — must be within the United States.

Hickox, the chair of California’s carbon market advisory group, supports a broad range of offsets in the Western market, if for no other purpose than to widen the number of people and companies involved in greenhouse gas reduction efforts.

“This shouldn’t just be about the oil and energy sector,” Hickox says. “If we don’t create a system that allows as many people as possible to be part of the solution, we’re failing ourselves.”

But some experts say allowing a large polluter to skip out on greenhouse gas reduction because he’s paid a forest landowner to maintain a forest, for instance, won’t ultimately solve global warming.

“If we just let people buy offsets and don’t drive technical innovation, we’re never going to get where we need to be,” says the NRDC’s Dale Bryk. “The offsets have to be really limited.”

 

The learning curve about carbon markets is steadily increasing, but California and the Westwide market will likely be flawed in some way at the beginning. “They have to build in a learning period, and just because it’s not 100 percent right from the get-go, doesn’t mean it’s failed,” says Michael Ashford, vice president for carbon trading at Econergy in Boulder, Colo.

Market-based systems have the ability to solve environmental problems, but they’re not a guarantee. The program to reduce acid rain in the East was successful, but a similar market-based program to cut air pollution in Los Angeles failed in the mid-1990s, because, among other things, it did not allow polluters to save their early emissions reductions and get credit for them later on.

Only a dynamic market will ultimately deliver reductions in overall greenhouse gases. Already, Europe has reacted to earlier failures by adjusting its system and significantly lowering emissions allowances for countries beginning in 2008. The Northeast states will sell at least 25 percent of their allowances to regulated companies and invest the proceeds in renewable energy and electric rate reductions.

Now it’s the West’s turn to lay some solid groundwork for its own market. Gov. Schwarzenegger’s carbon-market point man is confident the region will be able to see its way through the contentious issues and the pitfalls that have so far marred carbon markets. “Getting there may not be pretty,” Winston Hickox says. “But we’ll get it right, because it’s in our economic interest to solve this problem.”

The author writes from Portland, Oregon.

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