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Ready for CO2 Allowances? U.S. Passes on Emissions Cap, Kyoto or No

Fortnightly Magazine - May 15 1998

projects. Both companies hope to receive official recognition for their early efforts.

"We need formal recognition by the governments of both countries before this transaction is likely to proceed any further" and remaining options are used, says Steve Schaefer, Niagara Mohawk Power Corp. spokesman. He says the companies began working on the transaction well before Kyoto.

If CO2 reductions are mandated, most utilities seem to prefer a cap-and-trade program. This type of program would offer an economical way to address environmental problems, Schaefer says. "Part of the goal is to prove [that] emissions reductions could be good for the environment and good financially. Companies will have some freedom to determine how to achieve the [emissions] levels they are pursuing."

Niagara Mohawk hopes that companies like itself that achieved early reductions will be recognized, a sentiment likely shared by other utilities. Some have more work ahead of them than others (see Figure 3).

According to Joe Goffman, senior attorney at the Environmental Defense Fund, a nonprofit organization that oversaw the trade, several other utilities are interested in pursuing similar deals. The transaction was conducted under an allowance trading program EDF put together as a model for future legislation.

But it isn't clear what types of ventures would qualify for credit. Utilities are involved in a variety of projects including carbon sinks, in which trees are planted or old-growth forests maintained to offset power plant emissions. If such activities do qualify, some question whether projects set up in developing nations will count.

At press time, Cantor Fitzgerald Environmental Brokerage Services was poised to close a deal with a U.S. utility for options on 7.5 million tons of CO2 offsets from a portfolio of projects. By including CO2 offsets from a variety of projects across technologies, the utility minimizes its risk of buying into any one project that could later be deemed ineligible, says Carlton Bartels, senior vice president at the company. The company is one of the largest dealing in environmental credits in the U.S. and the official broker under the EPA's Acid Rain Program.

This deal will mark the first CO2 trade Cantor Fitzgerald has conducted. "This could be one of the largest commodity markets in the world," says Bartels.

"It's a market that will blow the doors off every other market that we know of," agrees Josh Margolis, senior vice president at Cantor Fitzgerald.

Trading for a Better Hand

How would a domestic CO2 allowance trading program work? Three major issues arise: (1) who would regulate participants? (2) how to allocate allowances? (3) how to credit projects and early actions?

Several groups have put together or are working on proposals. One is the Center for Clean Air Policy, a consortium of utilities, environmentalists and academics. With partial funding from the EPA, the center has proposed a plan similar that designed by EDF.

"We're really trying to think through all of the design elements of a domestic carbon trading system," says Tim Hardgrave, senior policy analyst at the Center. "There's a presumption¼ that this will look a lot like the [EPA's] Acid Rain