 December 10, 2006 - It's not enough money-yet-to stop polar ice caps from melting, but the pot has been sweet enough to lure Wall Street bankers into the fight against global warming. Nearly $23 billion will change hands this year on a new market that the European Union has created in a bid to save the planet through free enterprise. That's more than double the value in 2005, the inaugural year of the Emissions Trading Scheme. The market, based on a U.S. system that has curbed acid rain pollution, creates a financial incentive for cutting carbon. The 37 participating developed nations set limits on carbon emissions and hand out allowances to industry. Companies that cut their use of oil, coal, and natural gas can sell their spare allowances to firms hard pressed to reduce emissions. When former World Bank chief economist Nicholas Stern told the British government this fall that climate change was "the greatest market failure the world has seen," he pointed to the European system as "leading the way" toward a possible solution. But Stern and others would like to bring under the tent the world's No. 1 source of the harmful emissions, the United States.
Early on, the Bush administration rejected the Kyoto Accord, the international treaty to limit carbon dioxide and other "greenhouse gases" that trap solar heat and raise Earth's temperature, increasing the chance of floods, hurricanes, and drought. But many European market players believe the Democrats' victory in the midterm elections will create momentum for U.S. involvement, perhaps before the first phase of treaty commitments expires in 2012, says Mark Woodall, chief executive of Climate Change Capital in London, the largest carbon investment bank.
A deal? Republican Sen. John McCain thinks President Bush's view has shifted and that he'd sign a measure like the bipartisan carbon cap-and-trade bill McCain has crafted with Connecticut Sen. Joseph Lieberman. But many Democrats don't like that bill's pro-nuclear energy provisions. A long slog is certain, since the Democrats have to garner substantial GOP support in the closely divided Senate.
While Washington debates, activist governors of both parties may forge the first U.S. ties to international carbon trading. Seven northeastern states have agreed to put into place a cap-and-trade program to limit power plant emissions beginning in 2009. And California Gov. Arnold Schwarzenegger announced in October a market approach to implementing the state's new carbon law; he has signed an agreement with British Prime Minister Tony Blair to work toward connecting with the European system.
If so, they'd be joining in on a volatile market that has drawn an array of brokers, bankers, and arbitrageurs who make money on the gap between the costs of greenhouse-gas reduction projects and the current price of carbon allowances. That price rose steadily early in the year to nearly $40 per ton of carbon, then tumbled hard in the spring to less than $12 when it was revealed that several European governments had been too generous with their industries when handing out allowances.
The market recovered somewhat in summer but slumped again this fall along with energy prices. The price has been lolling around $12 a ton in recent weeks, way below the $85 a ton that economist Stern believes is the real cost to society of pollution from carbon.
The low price has driven participants to seek cheap solutions. A company or country can gain credits (with the approval of a United Nations oversight body) by investing in a carbon-reduction project in one of the world's poorer countries. Thus countries like China and India, under no obligation to cut carbon emissions under Kyoto, are the scenes of hundreds of environmental projects.
U.S. agricultural giant Cargill has invested in a project to capture methane gas from the wastewater lagoons on the farms of the largest pig producer in Mexico. Cargill's goal is to generate both carbon credits and electricity-a natural progression, its executives say, for a company that began 141 years ago as an agricultural commodities trader. "We believe CO2 is a commodity that over time will trade no different from natural gas, fuel oil, or any other futures in the financial markets," says Eugenio Meschini, managing director of Cargill Emission Reductions Services.
The project market is dominated by new facilities in China designed to capture and incinerate HFC-23, a greenhouse gas 11,700 times as potent as carbon dioxide. A waste byproduct in production of the refrigerant chemical HCFC-22, it is typically vented to the atmosphere. China is taxing 65 percent of project revenues to fund renewable energy investments; the World Bank, which has helped broker the largest such deals, says they demonstrate China's engagement on climate change. But some environmentalists criticize the projects as offering a perverse incentive to create more capacity for manufacturing HCFC-22, which is an ozone-depleting chemical.
Debates have arisen over nearly every type of carbon project. Trees absorb carbon dioxide, but the U.N. oversight board hasn't settled on how to measure the benefits of forestry. Little investment goes into expensive wind and solar energy. "The price of carbon is not enough to support those projects right now, if you can't get a favorable electricity price as well," says John Deacon of the London office of the U.S. law firm Hunton & Williams, which advises clients on carbon projects. In many countries that would be suitable for wind power, such as South Africa, governments hold down the price of electricity to help the poor. Energy developers couldn't make a return, unless the carbon credits they'd generate were more valuable.
"We're in search of standards," says Richard Sandor, chief executive of the Chicago Climate Exchange, a voluntary marketplace that mirrors what is going on in Europe. "Some things experimented with might not stand up two years from now, and some will. ... One should not expect a perfect product with any new invention." Goldman Sachs showed it has enough faith in carbon trading that in September it bought a 10 percent share of the holding company that owns both the Chicago exchange and the largest trading platform overseas, the European Climate Exchange.
Bets in billions. Another Wall Street vote of confidence: In October, Morgan Stanley announced it would invest $3 billion in the carbon market over the next five years-the largest single investment to date. An additional $7 billion is invested in more than 50 "carbon funds" worldwide, says Guy Turner, director of New Carbon Finance in London. Half the money comes from governments looking to meet their Kyoto targets and the other half from private and institutional investors like pension funds-with nearly 30 percent of the private money managed from the United States.
Despite all the activity, there's something notably lacking. "I have found it difficult to identify any substantial real investment in either emissions-reducing or efficiency technology in Europe," says Tony Ward, head of Ernst & Young's power and utilities group in London.
Point Carbon, an Oslo-based market analysis firm, estimates that about $5.2 billion will go into carbon reduction projects this year in poor countries. But banker Woodall estimates $50 billion a year is needed to make a dent in climate change. He's optimistic, noting that the world's No. 1 producer of carbon emissions also happens to be the largest source of capital. "A huge amount of investment would be available," he says, "if the international community got to grips with the problem-including the United States."
The growing trade in carbon emissions offers hope as a pollution solution
By Marianne Lavelle
Posted Sunday, December 10, 2006 |
