Green Effort Gets Energized

Large numbers of credits would be more expensive than small lots of credits. A company trying to buy too many credits may be outpriced, and thus unable to do so. These companies would have to either reduce their emissions output or cease operations. The system encourages companies to emit less greenhouse gases, but it gives companies a way to ease into the program without overburdening the economy.

Companies that have the technological ability to reduce their emissions or help others cut theirs can actually make money by doing so. For example, many utility companies like USCAP member Duke Energy DUK convert natural gas and coal into electricity and release their CO2 into the air.

By re-engineering their plants so that their CO2 is injected into the ground, they can sell credits for the emissions they don't produce. In this way, a cap-and-trade approach encourages companies to change out dirty processes for clean ones.

Businesses tend to support this approach over taxes or other emissions-control programs because it reduces the overall economic cost of adhering to environmental regulation. Inefficient businesses like coal-fueled power companies would have little recourse under a flat-tax system, and many would likely be forced to close their doors. Under cap-and-trade, these businesses can continue operating by purchasing emissions credits on an exchange.

Giant Footprints

Europe already has a functional emissions cap-and-trade program. Emissions credits are traded on the IntercontinentalExchange. Because CO2 emissions in the U.S. are the same as in Europe or the developing world, emissions trading offers a rare opportunity to create a pure global marketplace. As the Kyoto Treaty and other global agreements lure more participants to cap-and-trade, the global market will increase in size and liquidity.

The global "carbon footprint" -- a measure of CO2 emissions -- is currently 26 billion tons and growing, Fusaro said. Commodity markets are generally six to 20 times the size of the physical market (the actual amount of commodities like gold or oil produced), giving the global carbon market a potential size of 520 billion tons.

If emissions credits were worth roughly $30, as Fusaro suggests, the emissions market could reach $15 trillion in scope, dwarfing the size of the crude oil commodity market. These numbers are eye-catching for the financial firms and energy companies that would have access to the millions of dollars in potential profits via trading in emissions contracts.

Many questions remain concerning the logistics of a national cap-and-trade system, let alone a global one. The fight over choosing the major points of entry for greenhouse gas emissions is heating up, according to Eron Bloomgarden, U.S. director for EcoSecurities, a carbon-credit origination firm.

It is unknown whether legislation will ultimately place emissions caps on companies that produce hydrocarbons, such as oil companies, or companies that burn hydrocarbons, such as automobile companies.

The fact that BP and Conoco are members of USCAP while Ford F and General Motors GM are not may provide some light on this issue. This suggests that integrated oil companies might see a greater opportunity to profit from a cap-and-trade system than automobile companies do.

As the emissions market matures, it is likely that all relevant sectors will have to carry their burden of greenhouse gas emissions. "Even office buildings produce large amounts of greenhouse gasses, so ultimately real estate companies will have carbon caps as well," Fusaro said.

As more subsectors become stakeholders in the emissions market, the cost borne by individual companies will decline.

Fusaro says that federal cap-and-trade legislation should be expected sooner rather than later. "Financial firms and other stakeholders know there is money to be made in emissions trading, and they want this market now," said Fusaro.

In this case, now is hardly a figure of speech. Legislation regarding complex issues like climate change tends to not get passed during election years.

"We have a six-month window to get this passed, after which it will be too late," Fusaro said.

If companies are as urgent as Fusaro believes they are to build a nationwide emissions system, the U.S. soon may see advancements made on the environmental front, setting it on a new course toward real greenhouse gas emissions reductions.