Initiatives Underway to Cap Greenhouse Gas Emissions
Ken Silverstein
January 20, 2003
By Ken Silverstein Director, Energy Industry Analysis
[News Item from American Electric Power (NYSE:AEP)] AEP announced that it has joined the Chicago Climate Exchange, the first U.S. voluntary pilot program for trading greenhouse gas emissions. AEP is one of 14 founding members.
Analysis: The heat is on to send greenhouse gases up in smoke. Utilities are feeling the pressure to curb their carbon dioxide (CO2) emissions from all different angles, including not just environmentalists and some lawmakers but also from certain investors. AEP's “awareness” is considered a critical first move to getting corporate America onboard, and eventually the lawmakers who will be needed to fuel government changes.
While much of the developed world including Canada and Europe has opted to sign the Kyoto Protocol that mandates a five percent reduction in greenhouse gas emissions below 1990 levels between 2008 and 2012, the United States has said that joining the coalition would create economic upheaval at home. President Bush has thus far rejected the notion of CO2 emission limits, although his environmental objectives incorporate a free market approach to reducing other pollutants, such as sulfur dioxide (SO2), nitrogen oxide (NOx) and mercury.
CO2 emissions could eventually come under closer government scrutiny. Self regulation may achieve a desired result but the authority of a governing body that is able to enforce compliance may become necessary. No matter the approach, the policy must have teeth to be effective and give the public greater assurances. Realistically, CO2 caps are one of the most difficult emissions to control, largely because commercially available technologies to do so are absent.
Much of the world's scientific community says that global warming is a serious threat to the health and welfare of the human race. One of the biggest reinsurance companies, Munich Reinsurance Group, estimates that the climate phenomenon could have an adverse economic affect totaling $300 billion by 2050. Scientists at the insurer fear that the rate of natural disasters will continue to increase as a result of global warming.
Utilities say that they have responded by switching increasingly to natural gas and by implementing newer technologies that run more efficiently and produce fewer pollutants. Others have acted by using carbon sinks, which through forest preservation and tree planting work to trap carbon. Meanwhile, AEP says that Chicago Climate Exchange to which it has just signed on will serve as a mechanism for it to participate in the Bush administration's voluntary climate change program.
“AEP has considerable experience with existing sulfur dioxide and nitrogen oxide emissions credit markets,” says Dale Heydlauff, senior vice president for governmental and environmental affairs. “Our participation in the exchange is a natural next step, since it takes the market-based approaches that lowered the cost of emission reductions for the other gases and applies them to greenhouse gas emissions.”
Realistic Goals
What has AEP endorsed? The company has agreed to cut its greenhouse gas emissions by 4 percent over the next four years, beginning now. By reducing those emissions by one percent annually until 2006, it aims to cut 18 million tons of CO2 emissions based on current levels.
It's likely to achieve its reduction targets, given that it will implement a variety of techniques to do so. By using a greater percentage of natural gas to fire its plants and by implementing more renewable sources of power, such as wind, it says that it will achieve its aims. It would also create “carbon sinks” as well as use a direct purchase of emission credits from the exchange.
Members of the exchange, which include DuPont, Motorola and Ford Motor Co., say that all reductions will be verifiable and tangible. Under such a system, companies can trade emission credits to reduce overall emissions or to comply with regulator imposed emission limits if such limits are enacted down the road. It would obviously force an overall reduction in pollutants released. Businesses that emit less than the allowable limits can sell, bank or transfer those “credits.” Companies that are pushing the boundaries can either take steps to cut their pollution by implementing new technologies, by switching to a cleaner burning fuel or by buying “credits” from another business.
A similar exchange is already working in the United States. The 1990 Clean Air Act, for example, says that SO2 emissions from electric power plants are to be cut in half by the year 2010. Utilities are permitted to release one ton of the toxin a year per allowance held. If a plant cuts its emissions below its allowance, it will have leftover emission credits that it can sell to other utilities.
It's working, says EPA. SO2 emissions have dropped from 15.7 million tons in 1990 to 11.2 million tons in 2002. By 2010, the 8.95 million ton mark is expected to be hit. President Bush would expand that program and include a forum to buy and sell NOx as well, which is already traded on a very limited basis. CO2 emissions are not part of the president's plan.
Pressure Builds
Curbing CO2 is part of a bi-partisan initiative that is led by Senators Joe Lieberman, D-Conn, and John McCain, R-Ariz. Their bill proposes a comprehensive cap on such emissions and would permit a nationwide market-based trading program to realize those goals.
"It will reduce the greenhouse gas emissions that are slowly overheating our planet,” Lieberman said in a floor speech. “But it will also create a market by which corporations will receive valuable credits for efficient investments.”
Meanwhile, investors are also demanding change. In a campaign coordinated by the Coalition for Environmentally Responsible Economies (CERES) and the Interfaith Center on Corporate Responsibility (ICCR), shareholders groups at five large utilities that are considered major contributors of greenhouse gases filed global warming resolutions last Thursday. The effort is designed to make those companies disclose the economic risks of all of their emissions, including CO2, and to get the resolutions voted on before the utilities hold their annual shareholder meetings in the spring. Resolution filers included the State of Connecticut Plans and Trust Fund which filed at AEP; the Presbyterian Church, USA, which filed at Cinergy; the Sinsinawa Dominicans; Sisters of Charity of Elizabeth, NJ, and Sisters of St. Dominic of Caldwell, NJ which filed at Southern Company; Brethren Benefit Trust, Inc., filing at Xcel Energy; Benedictine Sisters at TXU; and Christian Brothers Investment Services at AEP. Some investors at AEP, Cinergy, Southern Co., TXU and Xcel say they want to get the resolutions voted on before the utilities hold their annual shareholder meetings in the spring. At least one company, Cinergy, has already petitioned the Securities and Exchange Commission to block the measure.
Foreign nations have also been critical of the U.S. for not endorsing global talks aimed at cutting greenhouse gas emissions. More than 180 nations formalized a deal to reduce such emissions last month under the Kyoto Protocol, although the legislative bodies of the signatory nations must still ratify the treaty. Pressure is on the United States to conform. In the next few years, however, it is unlikely that Congress or the president will enact required limits on CO2 emissions.
Philosophically, Bush and most congressional Republicans believe in a voluntary approach, much like the one in which AEP has agreed to comply. And practically speaking, conservatives control the committee process, the floors of both chambers and the White House. At the same time, the public is engrossed with other issues, such as a looming war and a crippled economy.
In time, however, the issue of forced reductions in greenhouse gas emissions is probably unavoidable. Not only could the cost of ignoring the problem mount but also the various stakeholders will no doubt continue to push for reform. It's happening now and is part of the impetus to resolve the matter through free market concepts. As the ground forces coalesce and the benefits manifest, lawmakers will, in turn, take serious notice. |
