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On global warming, what US can learn from Europe

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In the Senate, at least four major bills include a market-based approach to reduce global warming (see table). Even President Bush, an outspoken opponent of the Kyoto treaty, spoke of dealing with global warming by reducing dependence on oil in his State of the Union address last week. He made no mention of mandatory carbon caps. Polls show a majority of Americans favor action on global warming, as do a growing body of religious leaders.

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With the prospects improving for some kind of mandatory caps, some big companies have decided to engage policymakers on how tight regulations should be, who should be regulated, and how allowances will be allocated. Each decision could have a major impact on corporate profits – and the volume of emissions.

Last week, a coalition of 10 major corporations including Dupont, Alcoa, and General Electric called for "mandatory reductions" and "swift legislative action" to cut greenhouse-gas (GHG) emissions.

"For so long US industry was fighting any kind of GHG regulation," says Kyle Danish, a partner with Van Ness Feldman, a Washington law firm specializing in energy, the environment, and natural resources. "Now that it is appearing increasingly inevitable, they're starting to realize they have enormous stakes in all sorts of design issues. There are numerous lessons to be had from the European experience."

Caps face tough slog in Congress

Still, global warming remains a tough sell in Washington.

"The public is way ahead of Congress on climate change," says Frank O'Donnell, director of Clean Air Watch, a Washington environmental group. "There's this tension between what is scientifically appropriate and what is politically viable. Getting something enacted in this Congress is going to be a herculean task."

If and when Congress does pass mandatory caps on carbon emissions, perhaps its most important challenge will be to make the cost of emitting carbon-dioxide high enough to drive real change, analysts say.

At the moment, such emissions have no price tag in the US. Some 225 big US companies like Dupont and American Electric Power are already trying to slash their "carbon footprint" by voluntarily paying for "carbon offsets" that are traded on the fledgling Chicago Climate Exchange.

These offsets might be subsidizing energy-conservation projects or the building of windpower plants (which reduce the need for burning GHG-producing fuels).

The exchange reports that it has kept 10 million tons of CO2 out of the atmosphere over the past four years with such projects. But with US annual emissions totaling about 700 times that amount, making carbon costly is the key.

In fact, America's gargantuan billow of carbon gases could quickly become a robust $50 billion to $100 billion US market in carbon allowances, some analysts estimate. That's roughly two to four times the estimated carbon emissions that Europe traded last year.

If a business is energy efficient and a low-carbon emitter, it could earn emissions credits, selling those for profit. Electric utilities that rely on coal-fired power might find it cheaper to buy credits – or if the cost rises high enough, to build other types of generating facilities with fewer emissions.

Of the four major plans in the Senate, the one proposed by Sen. Jeff Bingaman (D) of New Mexico is the most detailed. If the costs of allowances soar, it would ensure that businesses pay no more than $7 per ton of carbon emitted.

Would carbon costing $7 per ton be an adequate spur for electric utilities and homeowners to cut energy consumption substantially?

An Energy Information Administration analysis released earlier this month finds it would cut greenhouse gases by only 2.6 percent annually between 2012 and 2021.