Water Scarcity Map
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Eclectic Investment
The Meaning
- Eclectic: (1) Selecting what appears to be best in various doctrines, methods, or styles. (2) Composed of elements drawn from various sources.
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- China's Urban Growth Overwhelms Water Supply
- Capital Pollution Solution?
- Carbon Offsets Sins of Emission
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Tuesday, August 29, 2006
Friday, August 25, 2006
Declining water supply brings a deluge of ideas
Declining water supply brings a deluge of ideas
By Mike A Scott
ft.com, August 17 2006
We live in a world in which 2.6bn people consume water from unsafe and polluted sources, according to United Nations figures. Against this, it takes up to 100,000 litres to produce 1kg of beef, 75 litres to make one computer chip and 780 litres to create one litre of fruit juice, says Waterwise, a UK non-governmental organisation – an idea known as “embedded water”.
These realities are now colliding, with serious consequences for business. “Everyone understands that water is essential to life. But many are just beginning to grasp how essential it is to everything in life – food, energy, transportation, nature, leisure, identity, culture and virtually all products used on a daily basis,” says Lloyd Timberlake of the World Business Council for Sustainable Development, a business think-tank, which next week launches a report on the subject.
Ford Motor’s Southampton plant, for instance, uses 6,000 litres of water to make one Ford Transit van, including body construction, painting, trimming and final assembly. But Waterwise says the total figure is 150,000 litres if you include the water that goes into processing the van’s components.
In the developed world, much of the water infrastructure must be replaced in the next 20 years, according to the Pacific Institute, a US think-tank, but other regions are at risk of more severe water supply problems.
In India, urban water demand is due to double and industrial demand to triple by 2025. Unreliable supply in Bangalore has already led information technology companies such as Wipro, iGate and MphasiS to consider other locations when they expand, says the Pacific Institute, while in 2003 PepsiCo and Coca-Cola lost their licences to use ground water in Kerala for their bottling plants after drought raised competition for the resource.
This month, they have faced calls for a ban in India after a report alleged their products contained high levels of pesticides. Coca-Cola was recently dropped from pension fund TIAA-Cref’s Social Choice Account, partly because of concerns over its exploitation of water around the world.
Companies must be aware of the vulnerability of their supply chains in sectors as diverse as textiles, electronics and consumer products. “Water as a business risk issue is something that we will be looking at more and more over the next few years,” says Nick Robins, head of socially responsible investment funds at Henderson Global Investors.
This explains why a company such as Unilever has initiatives ranging from a detergent that requires less rinsing for the Indian market to support for tomato farmers in Brazil to introduce drip irrigation, which cuts water use by 30 to 70 per cent, while increasing crop yields by 20 to 90 per cent, according to the World Resources Institute.
But there are also ample opportunities for business. The first issue to address if you want to reduce water use is how much you currently use, so organisations that provide metering systems, such as Itron of the US and Techem of Germany, are well placed.
Companies are also thriving by offering innovations in infrastructure replacement, filtration, irrigation and desalination. Amiad, an Israeli company listed on AIM, is doing well out of filtration and irrigation, and making inroads with drip irrigation systems that deliver fertiliser as well as water, saving on fertiliser and labour costs.
Developed countries will spend up to $1,000bn on upgrading water and waste water systems in the next few decades, says Emma Howard Boyd, head of SRI at Jupiter Asset Management, while “demand for water from urban areas and industry in China is expected to grow by 70 per cent and 104 per cent respectively between 2010 and 2030”. Among those poised to benefit are Asian water treatment companies such as HyFlux and Biotreat, both listed in Singapore.
Other innovators include Canada-based Pure Technologies, which has developed the SmartBall, an aluminium sphere equipped with a sensor, which travels along a pipeline pinpointing the location of leaks as it goes.
Insituform, a US-based company, has developed trenchless sewer repair technology that allows utilities to repair pipes without digging up roads.
It has worked in settings as varied as underneath the White House, in nuclear power plants and a Texas prison, which was keen to repair its pipes without putting temptation in the inmates’ way.
Zander Group, a UK company, uses a moisture-retaining material to encourage desert reversal and revegetation. It works by releasing moisture to root systems over a prolonged period, reducing the need for irrigation or rainfall.
Its subsidiary, Clear Earth, will also use the material as an underlying layer for pavements and car parks, where it filters contaminants out of water run-off and allows the water time to filter back to the ground water rather than running off down the drain.
James Cameron, vice-chairman of Climate Change Capital, a UK bank focused on low-carbon projects, says: “Managing water will be a premium business to be in.”
Food
It takes 200 litres of water to produce 1kg of rice
1kg of potatoes: 500 litres
1 orange: 53 litres
1 serving of lettuce: 22 litres
1 pint of milk: 250 litres
1 egg: 450 litres
1 loaf of bread: 550 litres
1 kg of butter: 18,000 litres
Textiles and consumer goods
1kg of cotton: 5,300 litres
1kg of wool: 200,000 litres
1 car: 150,000 litres
1 computer chip: 75 litres
Sources: Waterwise, Stanford University
By Mike A Scott
ft.com, August 17 2006
We live in a world in which 2.6bn people consume water from unsafe and polluted sources, according to United Nations figures. Against this, it takes up to 100,000 litres to produce 1kg of beef, 75 litres to make one computer chip and 780 litres to create one litre of fruit juice, says Waterwise, a UK non-governmental organisation – an idea known as “embedded water”.
These realities are now colliding, with serious consequences for business. “Everyone understands that water is essential to life. But many are just beginning to grasp how essential it is to everything in life – food, energy, transportation, nature, leisure, identity, culture and virtually all products used on a daily basis,” says Lloyd Timberlake of the World Business Council for Sustainable Development, a business think-tank, which next week launches a report on the subject.
Ford Motor’s Southampton plant, for instance, uses 6,000 litres of water to make one Ford Transit van, including body construction, painting, trimming and final assembly. But Waterwise says the total figure is 150,000 litres if you include the water that goes into processing the van’s components.
In the developed world, much of the water infrastructure must be replaced in the next 20 years, according to the Pacific Institute, a US think-tank, but other regions are at risk of more severe water supply problems.
In India, urban water demand is due to double and industrial demand to triple by 2025. Unreliable supply in Bangalore has already led information technology companies such as Wipro, iGate and MphasiS to consider other locations when they expand, says the Pacific Institute, while in 2003 PepsiCo and Coca-Cola lost their licences to use ground water in Kerala for their bottling plants after drought raised competition for the resource.
This month, they have faced calls for a ban in India after a report alleged their products contained high levels of pesticides. Coca-Cola was recently dropped from pension fund TIAA-Cref’s Social Choice Account, partly because of concerns over its exploitation of water around the world.
Companies must be aware of the vulnerability of their supply chains in sectors as diverse as textiles, electronics and consumer products. “Water as a business risk issue is something that we will be looking at more and more over the next few years,” says Nick Robins, head of socially responsible investment funds at Henderson Global Investors.
This explains why a company such as Unilever has initiatives ranging from a detergent that requires less rinsing for the Indian market to support for tomato farmers in Brazil to introduce drip irrigation, which cuts water use by 30 to 70 per cent, while increasing crop yields by 20 to 90 per cent, according to the World Resources Institute.
But there are also ample opportunities for business. The first issue to address if you want to reduce water use is how much you currently use, so organisations that provide metering systems, such as Itron of the US and Techem of Germany, are well placed.
Companies are also thriving by offering innovations in infrastructure replacement, filtration, irrigation and desalination. Amiad, an Israeli company listed on AIM, is doing well out of filtration and irrigation, and making inroads with drip irrigation systems that deliver fertiliser as well as water, saving on fertiliser and labour costs.
Developed countries will spend up to $1,000bn on upgrading water and waste water systems in the next few decades, says Emma Howard Boyd, head of SRI at Jupiter Asset Management, while “demand for water from urban areas and industry in China is expected to grow by 70 per cent and 104 per cent respectively between 2010 and 2030”. Among those poised to benefit are Asian water treatment companies such as HyFlux and Biotreat, both listed in Singapore.
Other innovators include Canada-based Pure Technologies, which has developed the SmartBall, an aluminium sphere equipped with a sensor, which travels along a pipeline pinpointing the location of leaks as it goes.
Insituform, a US-based company, has developed trenchless sewer repair technology that allows utilities to repair pipes without digging up roads.
It has worked in settings as varied as underneath the White House, in nuclear power plants and a Texas prison, which was keen to repair its pipes without putting temptation in the inmates’ way.
Zander Group, a UK company, uses a moisture-retaining material to encourage desert reversal and revegetation. It works by releasing moisture to root systems over a prolonged period, reducing the need for irrigation or rainfall.
Its subsidiary, Clear Earth, will also use the material as an underlying layer for pavements and car parks, where it filters contaminants out of water run-off and allows the water time to filter back to the ground water rather than running off down the drain.
James Cameron, vice-chairman of Climate Change Capital, a UK bank focused on low-carbon projects, says: “Managing water will be a premium business to be in.”
Food
It takes 200 litres of water to produce 1kg of rice
1kg of potatoes: 500 litres
1 orange: 53 litres
1 serving of lettuce: 22 litres
1 pint of milk: 250 litres
1 egg: 450 litres
1 loaf of bread: 550 litres
1 kg of butter: 18,000 litres
Textiles and consumer goods
1kg of cotton: 5,300 litres
1kg of wool: 200,000 litres
1 car: 150,000 litres
1 computer chip: 75 litres
Sources: Waterwise, Stanford University
posted by The Poster | 9:53 PM
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Water scarcity affects one in three
Water scarcity affects one in three
By Fiona Harvey in London
ft.com, August 21 2006
A third of the world’s population is suffering from a shortage of water, raising the prospect of “water crises” in countries such as China, India and the US.
Scientists had forecast in 2000 that one in three would face water shortages by 2025, but water experts have been shocked to find that this threshold has already been crossed.
Frank Rijsberman, director-general of the International Water Management Institute, said: “We will have to change business as usual in order to deal with the growing water scarcity crisis.”
About a quarter of the world’s population lives in areas of “physical water shortage”, where natural forces, over-use and poor agricultural practices have led to falling groundwater levels and rivers drying up. But a further 1bn people face “economic water shortages”, because lack the necessary infrastructure to take water from rivers and aquifers.
The findings come from a report compiled by 700 experts over five years, the Comprehensive Assessment of Water Management in Agriculture from the International Water Management Institute, presented on Monday at World Water Week in Stockholm, an international meeting of water experts.
David Molden, co-ordinator of the report, said: “If we continue to manage water in the way we do now, there will more problems with scarcity.”
He said agricultural practices could easily be improved to reduce the wastage of water.
Farming uses up 70 times more water than is used for domestic purposes such as cooking and washing. In Thailand, the amount of water used to grow food is about 2,800 litres per person per day. In Italy, about 3,300 litres are required to produce each person’s food every day, of which about half goes on making ham and cheese and a third to pasta and bread.
Shortages of water are already biting in countries such as Egypt, which imports more than half of its food because it lacks enough water to grow more. In Australia, there is a water shortage in the Murray-Darling basin because so much has been diverted for use in agriculture. In the US, there are increasing disputes with Mexico over the sinking levels of water in the Colorado river.
Water shortages are compounded by corruption, according to Transparency International. David Nussbaum, chief executive, said between 20 and 40 per cent of total investment in the water sector “does not flow to the people who should be getting the clean water and sanitation”.
He said big water projects, such as the construction of water networks and treatment facilities, were subject to corruption on a grand scale, but that petty corruption was also common, for instance in cases of people paying bribes to have their water bills reduced.
The result of both was that it cost poor people more to get access to water, he said.
But he pointed to the success of a high-profile water “integrity pact” developed in Karachi in Pakistan since 2002 and completed in May this year, as an example of how water projects could be made more transparent. He said the pact had saved at least $3m that would otherwise have been lost to corruption.
By Fiona Harvey in London
ft.com, August 21 2006
A third of the world’s population is suffering from a shortage of water, raising the prospect of “water crises” in countries such as China, India and the US.
Scientists had forecast in 2000 that one in three would face water shortages by 2025, but water experts have been shocked to find that this threshold has already been crossed.
Frank Rijsberman, director-general of the International Water Management Institute, said: “We will have to change business as usual in order to deal with the growing water scarcity crisis.”
About a quarter of the world’s population lives in areas of “physical water shortage”, where natural forces, over-use and poor agricultural practices have led to falling groundwater levels and rivers drying up. But a further 1bn people face “economic water shortages”, because lack the necessary infrastructure to take water from rivers and aquifers.
The findings come from a report compiled by 700 experts over five years, the Comprehensive Assessment of Water Management in Agriculture from the International Water Management Institute, presented on Monday at World Water Week in Stockholm, an international meeting of water experts.
David Molden, co-ordinator of the report, said: “If we continue to manage water in the way we do now, there will more problems with scarcity.”
He said agricultural practices could easily be improved to reduce the wastage of water.
Farming uses up 70 times more water than is used for domestic purposes such as cooking and washing. In Thailand, the amount of water used to grow food is about 2,800 litres per person per day. In Italy, about 3,300 litres are required to produce each person’s food every day, of which about half goes on making ham and cheese and a third to pasta and bread.
Shortages of water are already biting in countries such as Egypt, which imports more than half of its food because it lacks enough water to grow more. In Australia, there is a water shortage in the Murray-Darling basin because so much has been diverted for use in agriculture. In the US, there are increasing disputes with Mexico over the sinking levels of water in the Colorado river.
Water shortages are compounded by corruption, according to Transparency International. David Nussbaum, chief executive, said between 20 and 40 per cent of total investment in the water sector “does not flow to the people who should be getting the clean water and sanitation”.
He said big water projects, such as the construction of water networks and treatment facilities, were subject to corruption on a grand scale, but that petty corruption was also common, for instance in cases of people paying bribes to have their water bills reduced.
The result of both was that it cost poor people more to get access to water, he said.
But he pointed to the success of a high-profile water “integrity pact” developed in Karachi in Pakistan since 2002 and completed in May this year, as an example of how water projects could be made more transparent. He said the pact had saved at least $3m that would otherwise have been lost to corruption.
posted by The Poster | 9:53 PM
|
0 comments
Wednesday, August 23, 2006
China's Urban Growth Overwhelms Water Supply
China's Urban Growth Overwhelms Water Supply
By SHAI OSTER
WSJ, August 23, 2006
China's water pollution and its shortage of clean water are hindering the country's economic development as rapid urbanization overwhelms the system, a top official warned.
"Generally speaking, the situation is deteriorating," Qiu Baoxing, vice minister of construction, said yesterday in Beijing. The problems are worsening despite a strong push by the central government and a pledge to spend one trillion yuan, or about $125 billion, to clean up the water supply.
China's urbanization is straining water resources. "We're adding about the equivalent of a New York each year," Mr. Qiu said, noting that 13 million to 15 million people move into urban areas annually. "During this stage, China will suffer from the most severe water pollution," he said. "This stage is a critical point."
Most of China's cities have waste-water treatment plants. But the ministry said many cities either aren't using them at all or are running them at only 30% of capacity because of lack of funds. By the end of last year, about 52% of the waste water from cities was being treated, up from 34% in 2000.
China plans to invest 330 billion yuan on sewage treatment in cities from this year to 2010, Mr. Qiu said. Beijing is courting foreign companies that can provide technology for waste-water treatment and recycling, and has been working with the International Finance Corp. and other multinational organizations on attracting foreign investors to the sector. The country next month will host the fifth World Water Congress.
Most of the country's rivers, lakes and canals are polluted by discharges of untreated industrial and domestic waste water as well as water runoff from farms that is laden with pesticides. The government says some 300 million people don't have access to clean drinking water. A drought this summer in the western province of Sichuan has exacerbated the problem, while cities in the northeast such as Beijing face perennial water shortages.
The water shortage in China's north is so severe that the government is revamping the ancient Grand Canal that is used to transport goods from the commercial city of Hangzhou. Construction also has begun on an entirely new canal, costing billions of yuan, that will carry water north from a tributary of the Yangtze River. At one point, the planned canal will move water underneath China's Yellow River, through a tunnel in the riverbed.
Mr. Qiu said water-conservation efforts and better recycling of just one-third of the water currently used in China's cities could make available a supply equal to the total volume of water that will flow on the new canal.
Leakage remains a problem. About 20% of a typical Chinese city's water supply is lost because aging pipes leak badly -- more than double the rate of losses for a city in the West, Mr. Qiu said.
China is gradually increasing charges for water use to encourage conservation and cover the cost of treatment. Mr. Qiu said the government will implement higher rates for industrial users and give discounts to enterprises that treat their water before discharging. He said new rates could be in place later this year or in early 2007.
Despite the grim picture, some major cities have managed to cut their water use. Another Chinese official said that Beijing, which is working to improve its image ahead of the 2008 Olympics, consumed 3.5 billion metric tons last year, compared with between four billion to five billion tons earlier.
The capital still has water issues. Recently, residents in parts of Beijing have complained about the quality of their water, and are resorting to bottled water for cooking and drinking. Mr. Qiu said that while he uses tap water for cooking, he uses bottled water for making tea.
By SHAI OSTER
WSJ, August 23, 2006
China's water pollution and its shortage of clean water are hindering the country's economic development as rapid urbanization overwhelms the system, a top official warned.
"Generally speaking, the situation is deteriorating," Qiu Baoxing, vice minister of construction, said yesterday in Beijing. The problems are worsening despite a strong push by the central government and a pledge to spend one trillion yuan, or about $125 billion, to clean up the water supply.
China's urbanization is straining water resources. "We're adding about the equivalent of a New York each year," Mr. Qiu said, noting that 13 million to 15 million people move into urban areas annually. "During this stage, China will suffer from the most severe water pollution," he said. "This stage is a critical point."
Most of China's cities have waste-water treatment plants. But the ministry said many cities either aren't using them at all or are running them at only 30% of capacity because of lack of funds. By the end of last year, about 52% of the waste water from cities was being treated, up from 34% in 2000.
China plans to invest 330 billion yuan on sewage treatment in cities from this year to 2010, Mr. Qiu said. Beijing is courting foreign companies that can provide technology for waste-water treatment and recycling, and has been working with the International Finance Corp. and other multinational organizations on attracting foreign investors to the sector. The country next month will host the fifth World Water Congress.
Most of the country's rivers, lakes and canals are polluted by discharges of untreated industrial and domestic waste water as well as water runoff from farms that is laden with pesticides. The government says some 300 million people don't have access to clean drinking water. A drought this summer in the western province of Sichuan has exacerbated the problem, while cities in the northeast such as Beijing face perennial water shortages.
The water shortage in China's north is so severe that the government is revamping the ancient Grand Canal that is used to transport goods from the commercial city of Hangzhou. Construction also has begun on an entirely new canal, costing billions of yuan, that will carry water north from a tributary of the Yangtze River. At one point, the planned canal will move water underneath China's Yellow River, through a tunnel in the riverbed.
Mr. Qiu said water-conservation efforts and better recycling of just one-third of the water currently used in China's cities could make available a supply equal to the total volume of water that will flow on the new canal.
Leakage remains a problem. About 20% of a typical Chinese city's water supply is lost because aging pipes leak badly -- more than double the rate of losses for a city in the West, Mr. Qiu said.
China is gradually increasing charges for water use to encourage conservation and cover the cost of treatment. Mr. Qiu said the government will implement higher rates for industrial users and give discounts to enterprises that treat their water before discharging. He said new rates could be in place later this year or in early 2007.
Despite the grim picture, some major cities have managed to cut their water use. Another Chinese official said that Beijing, which is working to improve its image ahead of the 2008 Olympics, consumed 3.5 billion metric tons last year, compared with between four billion to five billion tons earlier.
The capital still has water issues. Recently, residents in parts of Beijing have complained about the quality of their water, and are resorting to bottled water for cooking and drinking. Mr. Qiu said that while he uses tap water for cooking, he uses bottled water for making tea.
posted by The Poster | 10:17 PM
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Saturday, August 12, 2006
Capital Pollution Solution?
Capital Pollution Solution?
By JEFF GOODELL
The New York Times, July 30, 2006
Richard Sandor, chairman and C.E.O. of the Chicago Climate Exchange, seems to be fond of green. His business card and company stationery are trimmed in green; he wears green neckties. When he is photographed by the news media, there’s lots of green in the frame: green file folders, green paper, anything. For Sandor, it may be a way of signaling that the Chicago Climate Exchange — a commodities market for an unusual kind of commodity, greenhouse gas allowances — is more than just another business venture. It is, as he describes it, the engine of an environmental revolution.
But of course, green is also the color of money. And Sandor, who has been called “the father of financial futures” for his role in creating interest-rate futures in the 1970’s and who made a fortune during the boom years of the 80’s at Drexel Burnham Lambert, the firm of the junk-bond king Michael Milken, is also familiar with that particular shade. However high-minded in principle, the Chicago Climate Exchange is also about making a buck off the planet’s looming climate catastrophe.
Not that there’s anything wrong with that. In fact, the trading of greenhouse gas allowances, also known as carbon trading, may be capitalism’s best answer to the problem of global warming. To avoid a dangerous degree of climate change, many scientists say, greenhouse gas emissions worldwide will have to be cut by 50 to 70 percent over the next 50 years. The only hope of achieving that, short of an unforeseen technological breakthrough or the passage of draconian environmental laws, is to inspire radical change in the economic system. In a carbon-trading scheme, you must pay to pollute: price tags are placed on greenhouse gas emissions and then the market (not the government) essentially figures out the cheapest, most efficient way to reduce them. “The beauty of carbon trading,” Dan Dudek, chief economist at Environmental Defense, a nonprofit advocacy group, explained to me, “is that it takes a primal human impulse — greed — and redirects it toward saving the planet rather than destroying it.”
Last year, the European Union set up a carbon-trading scheme, the E.U. E.T.S. (Emission Trading Scheme), which, despite some recent problems in its teething stage, may reach $30 billion in market activity by the end of this year. Many economists speculate that a global carbon market could become the largest commodities market in the world. If the Chicago Climate Exchange were to become a major trading venue, as Sandor says he hopes it will, the commissions alone could be worth many millions.
For the time being, Sandor’s operation is somewhat more modest. The exchange, also known as CCX, opened for business in December 2003, after raising $25 million in a public offering on the Alternative Investment Market, a part of the London Stock Exchange. By May of this year, more than six million carbon allowances had been traded on the exchange, and the price for the allowances was hovering between $3 and $5 per metric ton of carbon dioxide. CCX now has more than 175 participants, including corporations like American Electric Power, Ford, Motorola, DuPont and I.B.M., as well as the state of New Mexico and six American cities, including Portland, Ore., and Oakland and Berkeley, Calif. Sandor says that in 2004, the members of CCX reduced carbon emissions by 30 million metric tons, roughly equivalent to the yearly emissions of two big coal plants. “CCX is growing,” the energy trading consultant Peter Fusaro told me recently, “but compared with mature exchanges like the New York Mercantile Exchange, the volumes are still minuscule.”
What makes CCX exceptional, despite its small size, is that it’s a private, voluntary endeavor. In Europe, the E.U. E.T.S. is a multinational, government-sanctioned project. The driving force behind the E.U. E.T.S. is a carbon-trading scheme that is built into the Kyoto Protocol, the 1997 international agreement on climate change, which committed industrialized nations to cutting greenhouse gas emissions by 5.2 percent from 1990 levels. (Kyoto’s emissions oversight is not scheduled to kick in until 2008, but last year the European Union set up the E.U. E.T.S. to help its members prepare for that eventuality.) By contrast, in the United States, which has not ratified Kyoto, there is no government-sanctioned carbon market.
Some analysts, including Sandor, contend that it’s just a matter of time before the United States adopts some sort of national emissions-trading scheme. Pressure is building on several fronts: environmentalists are demanding action on global warming, investment banks covet the arbitrage opportunities that a carbon market affords and international corporations seek long-term regulatory certainty. “I think it’s all but inevitable that a trading program will become the tool of choice for managing emissions in the U.S.,” Christine Todd Whitman, the former New Jersey governor and the administrator of the Environmental Protection Agency early in the Bush administration, told me recently. “It’s just a question of when and how the program will be designed.”
Several players are taking steps to design and implement trading schemes in the United States. In effect, they are jockeying for what economists call “first-mover status,” hoping to create the prototype for what might become a future national carbon market. A group of seven Eastern states have banded together to create a regional greenhouse gas initiative, known as R.G.G.I., which is scheduled to begin in 2009. In the West, a number of states, led by California, are considering a similar initiative.
And then there’s Sandor. No one has done more than he has to get a carbon market up and running in the United States. The World Resources Institute, a private environmental research group and an associate member of the exchange, has given Sandor an endorsement. “The Chicago Climate Exchange is an important experiment in reducing greenhouse gas emissions,” the institute’s president, Jonathan Lash, told me. Bill Richardson, the governor of New Mexico, whose state is a participant in CCX, suggests that Sandor’s project is here to stay. “I think the Chicago Climate Exchange is part of America’s future,” he said when I spoke with him. “We felt that the sooner we became a part of it, the better.”
But some observers are more wary. Mark Trexler, an industry consultant who is an advocate of emissions trading, told me that in Sandor’s rush to gain a foothold in this growing market, he may be undermining the integrity and effectiveness of the very system he presumes to advocate. It may be true that a market-based system is an indispensable means for combating global warming, but does it follow that an entrepreneur, no matter how well intentioned, can be trusted to design that system for the public good? “My fear is that if we aren’t rigorous enough in how we set up a trading system right now,” Trexler said, “we could end up discrediting trading as a tool to deal with global warming. If we’re not careful, people could get the idea that it’s all a fraud. And that would be a disaster, both for us and for the planet.”
On a recent morning, I visited Sandor in the CCX offices, which are housed in a skyscraper designed by Philip Johnson on LaSalle Street in Chicago. Sandor, who is 64, has a quick, practiced smile that suggests no lack of self-confidence. He speaks plainly and seriously about the dangers of global warming, though at times he can sound as if he’s trying to sell you something — which, of course, he is.
As we talked in his office, I noticed a green silicone band on his right wrist. It was similar to the yellow Live Strong wristband that Lance Armstrong popularized to support his fight against cancer. It struck me as odd, since Sandor didn’t seem to be a wristband sort of guy. I asked him about it.
“It’s a CCX wristband,” he explained. “I never take it off. Want one?”
He opened a drawer in his desk, took out a wristband in a plastic bag and handed it to me. I opened it and read the slogan on the band: “CCX — To Save the Planet.”
“That’s a big job,” I said, poking fun at the immodesty of the slogan. “You’re serious about this, aren’t you?”
“Very serious,” he said, stone-faced.
Sandor began his career as an academic, teaching economics at the University of California at Berkeley in the late 60’s. Inspired in part by a credit crunch that hit California in those years, he came up with the idea of interest-rate futures, a financial instrument that would allow banks and investors to hedge against future changes in interest rates. In 1972, he left academia and joined the Chicago Board of Trade as an economist. In 1982, he followed the financial boom to Wall Street, taking a job at Drexel, where he worked developing futures markets in insurance and other fields. By 1990, however, Drexel was in bankruptcy, and Sandor turned his attention elsewhere: to environmental problems and how market mechanisms might be used to solve them.
Sandor’s interest was sparked by the Environmental Protection Agency’s 1990 Acid Rain Program, which sought to reduce sulfur dioxide emissions from coal-burning power plants in the United States. The design of the program was ingenious but simple. Instead of trying to regulate sulfur dioxide emissions the usual way, by dictating a certain kind of emissions-control technology on each power plant, the E.P.A. employed what is known as a cap-and-trade program. The agency set an overall limit, or cap, on the amount of emissions permitted from all power plants combined. Then it allotted a certain number of pollution allowances to each emitter and let the operators of individual plants figure out how they wanted to proceed. A company might install scrubbers or switch to lower sulfur coal in order not to exceed its quota, but if the company determined that polluting beyond its quota was necessary, it could buy additional allowances from companies that had not used up their allotments. Companies that reduced their emissions could bank their credits for later use or sell them for a profit.
Fascinated, Sandor joined the E.P.A.’s Acid Rain Advisory Committee, which was charged with helping to implement the new law. Among other things, Sandor persuaded the E.P.A. to hold the annual auction for sulfur dioxide allowances on the exchange run by his former employer, the Chicago Board of Trade. In the end, the cap-and-trade program reduced pollutants more quickly, and far more cheaply, than anyone anticipated and became the model for market-based environmental success. Best of all, it helped transform the problem of reducing pollution from a moral issue into a pragmatic one.
Not long after the acid-rain program began, Sandor and other economists began thinking about how to apply the same market-based strategies to an even bigger problem, with an even bigger potential market: global warming. Whereas sulfur dioxide is a pollutant emitted from a measurable number of specific smokestacks, greenhouse gases, which are commonly measured in metric tons of carbon dioxide equivalent, are emitted from millions of diverse sources, including cars, jets, farm animal waste, factories and power plants. And unlike sulfur dioxide, which is a regional pollutant, greenhouse gases are a global problem: a metric ton of carbon dioxide emitted in Russia has the same impact on the atmosphere as a metric ton emitted in Ohio.
Despite these critical differences, in principle the same market-based approach could be used. First, set the overall limit of greenhouse gases that countries are collectively permitted to emit, then distribute (or auction off) allowances among various pollution sources within each country and sit back and watch the emitters trade those allowances as their needs and market strategies dictate. There would even be room for speculators to join in the market: if you think next summer is going to be a scorcher, you might buy up allowances on the theory that in hot weather, coal plants often run at maximum capacity to meet the power demand, dumping more carbon dioxide into the atmosphere and thus raising the demand (and the price) for carbon allowances.
A key innovation in the design of carbon markets was the idea of offsets. The basic concept was that polluters could earn emissions credits not only by cutting their own carbon emissions but also by assisting in efforts to reduce emissions from other sources elsewhere in the world: for instance, by paying farmers to reduce the emission of methane, a potent greenhouse gas, from animal waste. Another example of an offset was the so-called natural carbon sink — something like a forest, which absorbs carbon dioxide through photosynthesis. If you increase the absorption of carbon dioxide with plants, you create the same net effect on the atmosphere as cutting emissions from your car — so why not allow polluters to earn credits for, say, investing in reforestation?
The use of offsets also added the possibility for greater profits and speculation by carbon traders. For instance, if the price for carbon emissions credits is, say, $15 a metric ton, a company that can buy or lease land in Brazil and plant trees that will sequester carbon for the equivalent of $2 a metric ton stands to make a tidy sum by selling the credits it can generate.
Policy makers in the United States were excited by the idea of carbon trading, and during the mid-1990’s, American negotiators pushed hard to make sure the framework for a carbon-trading scheme was included in the Kyoto Protocol. Sandor, for his part, was eager to capitalize on a global carbon market and began dreaming up the idea for an all-electronic exchange for carbon trading. In 2000, with a $450,000 grant from the Joyce Foundation, a private organization with a history of financing environmental initiatives, he enlisted about 100 people — power-industry executives, environmentalists, lawyers — to study the feasibility of establishing a voluntary market in advance of what he assumed would eventually be a mandatory emissions-trading scheme in the United States. In theory, his market would give companies practice measuring and managing their greenhouse gas emissions, preparing them for life in a carbon-constrained world. It would also put him in a position to be the dominant trading platform when the American market opened in earnest.
Sandor’s first challenge was to recruit companies to join the exchange, and his ace in the hole was American Electric Power, or A.E.P. Sandor, it so happened, had joined A.E.P.’s board of directors at about the same time as the design process for CCX was getting under way. Not surprisingly, in 2000, A.E.P. enlisted in CCX and was joined by a number of other blue-chip corporations, including Ford and I.B.M.
In 2001, the Bush administration threw CCX a curve when it declined to ratify Kyoto. As a result, when CCX opened for business in 2003, it became virtually the only carbon-trading game in town for the foreseeable future. As with the trading scheme regulated by Kyoto, CCX brokers trades for credits of the six main greenhouses gases; its transactions are audited by N.A.S.D., a respected private securities industry regulator; and it has links to the E.U. E.T.S., where Sandor also runs an exchange. Unlike Kyoto, however, CCX has no teeth: it is an entirely private effort. In the first full month of trading on CCX, credits for about 82,000 metric tons of greenhouse gases swapped hands at a price of about $1 per metric ton. “It was a little like the Wright brothers at Kitty Hawk,” Sandor told me. “Nobody believed it would fly. But it did. Maybe not elegantly at first, but it flew.”
Not everyone was so upbeat about CCX. When the exchange first began recruiting companies to join and soliciting environmental groups for endorsements, several of those groups started to have reservations. The Natural Resources Defense Council and Environmental Defense kept their distance. The Nature Conservancy consulted on the rules for CCX’s forestry offsets but did not join the exchange. The concern, several members of these groups told me, was that the initial design of CCX was too industry-friendly. Of its participating emitters, CCX required emissions reductions of just 1 percent a year during the market’s first phase, from 2003 to 2006. (This was far more modest than even the gentle cuts mandated under Kyoto.) CCX’s trading scheme threatened no explicit penalties for companies that missed their targets; in fact, a provision was included in the exchange’s rule book stating that emissions more than 4 percent over a company’s baseline (today it’s 7 percent) would not even be counted. Finally, the rules that governed the use of offsets, critics said, were lax. “Clearly, the initial goal was to make it as painless as possible for companies to sign up,” the industry consultant Mark Trexler told me. “If you’re designing a voluntary system, it’s hard to do it any other way.”
Despite the claim that industry had a strong influence on the design of CCX, many of the biggest emitters — including companies with solid environmental credentials, like BP, the global oil and gas conglomerate, and Cinergy, the Midwestern electric-power company — declined to sign on. There were a variety of reasons given for this, but one of the most important issues very likely concerned something called the emissions baseline. In any trading scheme, picking a baseline — the point from which emissions increases and reductions are measured — is controversial. In the Kyoto Protocol, for instance, all reductions are measured against a baseline of emissions levels in 1990. For its baseline, CCX decided to use an average of emissions from 1998 to 2001. As it happened, one of the big nuclear plants of A.E.P. was mostly shut down during those years, meaning that A.E.P. had to burn more coal to make up for it, presumably inflating its carbon dioxide emissions. Thus, the choice of an artificially high 1998-2001 baseline was a benefit to A.E.P. (on whose board Sandor sits), since it could more easily remain below it.
Bruce Braine, vice president for strategic policy analysis at A.E.P. and a CCX board member, told me that “the question of establishing baselines is always difficult. No matter how you choose to set them, someone complains that it’s unfair.” But as I was told by one former executive for CCX, who was granted anonymity because the executive was not authorized to discuss CCX’s internal matters, “other big emitters had no interest in joining a program that seemed designed to help A.E.P. look like a good corporate citizen.”
In the three years that CCX has been in operation, criticisms from environmentalists have only grown. This is particularly the case with CCX’s standards for using agricultural offsets, in which carbon is sequestered in farmland soils and then sold for emissions credits. Agricultural offsets are notoriously difficult to measure and quantify, and a less-than-rigorous program is essentially a way of introducing overvalued emissions allowances into the trading system. Advocates of carbon trading like Environmental Defense have worked hard to develop stringent protocols for soil sequestration, while others, like David Doniger, the climate policy director at the Natural Resources Defense Council, remain skeptical of the whole concept. “The problem with these kinds of offsets is that we’ve never found a way to separate the wheat from the chaff,” Doniger told me. “There is a constant tension between quality control and high participation rate. And it’s usually quality that goes in the toilet.”
To check this out for myself, on a rainy afternoon this spring I drove a few hours southwest of Omaha to visit Steve Wiese, a 51-year-old farmer who earns extra money by sequestering carbon on his 2,500-acre farm and selling the carbon allowances on CCX. When I arrived, Wiese was going over some paperwork in his barn. On his desk was a check for $2,008.94. “It just came in the mail the other day,” Wiese said, waving it happily.
Wiese, like hundreds of other farmers who are getting paychecks from carbon emitters by way of CCX, practices a form of cultivation known as no-till. Instead of tearing up the fields each spring and releasing the carbon stored in the soil (mostly in the form of decomposing plant matter and roots), no-till farmers plant right over the previous year’s crop, leaving the soil undisturbed.
“How long have you been no-tilling?” I asked him.
“About 14 years,” he said, leaning back in his chair.
“How long have you been getting paid by CCX?”
“Just signed up last year,” he said.
Here was an instance of a major problem that critics of CCX have raised: Wiese is getting paid for storing carbon in his soil, even though he has done nothing to increase the amount of carbon that is being stored on his land — he’s just doing exactly what he’s been doing for the last 14 years. A polluter like A.E.P. or Ford can use a credit from Wiese’s farm to offset their greenhouse gas emissions, but the fact is, in cases like these the payments from CCX are having no net effect on the level of greenhouse gases in the atmosphere.
And Wiese is hardly alone. Of the half-dozen farmers I spoke to in Nebraska and Iowa, all had started no-tilling before they ever received a check from CCX. When I asked Sandor about this, he argued that it doesn’t matter if these agricultural reductions are “real” or not, because they make up only a small fraction of CCX’s overall reductions. “What’s important,” he told me, “is to incentivize people who are doing the right thing. I think of these payments as a kind of ‘tickler.’ ” To critics like Doniger, though, the problem is that Sandor doesn’t advertise these kinds of offsets as a “tickler” — he advertises them as actual improvements in the atmosphere.
Environmentalists have also raised questions about another aspect of CCX: how it calculates emissions reductions. Sandor regularly notes that CCX members reduced carbon emissions by 14 million metric tons in 2003 and 30 million metric tons in 2004. (2005 numbers aren’t available yet.) That is, of course, a good thing. But it’s not clear that CCX should get the credit.
Consider the case of DuPont. Overall, DuPont’s carbon dioxide emissions are down 72 percent since 1990 — an example, according to Edwin Mongan, the director of energy and environment at DuPont, of “what a company can do if it sets its mind to it.” DuPont has beat its CCX baseline by more than 50 percent, cutting emissions by 8 million metric tons more than required. “We’re supportive of CCX because it has given us experience trying out selling, working in a carbon market,” Mongan told me. But he also suggested that being a member of CCX has not, in itself, led to reduced emissions. “I think CCX has been most valuable to us in helping to certify and validate the emissions cuts that we’ve already made,” he said.
The fact that companies like DuPont are reducing their carbon emissions does not mean that the emissions reductions trumpeted by CCX are necessarily unreal. But it may mean that these reductions are mostly the result of good corporate citizenship, not the power or efficiency of Sandor’s market.
Unfortunately, sorting out the real from the unreal is not always easy with CCX projects. It was precisely this difficulty that bothered David Littell, the commissioner of Maine’s Department of Environmental Protection, when he heard a pitch from CCX in 2004. At the time, CCX had approached a number of states about joining the exchange. Maine, which was among the first states to take progressive action on global warming, was a coveted recruit for CCX. Littell told me that he and other state administrators were “generally supportive” of CCX’s goals but had concerns that the exchange “was a system set up by private entities, with private transactions, set up to ensure confidentiality.” Why was this a problem? “It creates an appearance that the emission reductions might not be enforceable and verifiable,” Littell told me. Like several other Eastern states that were courted, Maine didn’t sign up.
Instead, Littell is now concentrating on the creation of R.G.G.I., the regional greenhouse gas initiative that also involves Connecticut, Delaware, New Hampshire, New Jersey, New York and Vermont. Unlike with CCX, which was devised essentially behind closed doors by a group of corporations, the creation of the rules for R.G.G.I. has been open and transparent, with dozens of public meetings and ample time for all stakeholders — environmentalists, industrialists, politicians, citizens — to comment on the program’s design. As a result, the program is proceeding cautiously; for instance, instead of allowing a wide variety of offsets, as CCX does, the R.G.G.I. program will begin with a limited set of five categories of offsets (including collecting methane from landfills) and does not include the controversial agricultural offsets. “We believe public confidence in the program is vital,” Franz Litz, of the New York State Department of Environmental Conservation, told me.
If CCX has such troubling flaws, why has it attracted so much support, particularly in corporate America? One explanation, provided by Sandor and others who endorse CCX, is that by joining CCX, companies get valuable experience managing emissions in a functioning market. In addition, of course, there is the public-relations benefit that goes along with being part of an enterprise that is widely viewed as part of the solution, not part of the problem.
But what’s going on here may be more complicated than that, and it has to do with that other shade of green. The logic goes like this: in a few years, if a mandatory carbon-trading system is finally established in the United States, one of the most contentious issues in the design of that system will be how companies that have already made reductions in their emissions will be credited for those reductions — if indeed they are credited at all. In other words, should a company like DuPont or I.B.M., both good corporate citizens that have already made sizable cuts in emissions, be required to reduce greenhouse gas emissions just as much as a competitor who has done nothing? If they do get credit for those early reductions, how might that credit be measured? For DuPont and I.B.M., hundreds of millions of dollars could be at stake in how this question is resolved.
With CCX, Sandor has effectively played this uncertainty to his advantage. The bigger CCX gets, the more cities and states it can get to join, the more likely it will be that carbon credits on the exchange will be viewed as the de facto standard by politicians and others responsible for designing a national system — and the more likely it will be that credits on the exchange, which at the moment are only informally recognized among CCX participants, will be grandfathered into a national system and granted full legal status as property rights. “This is all about business,” one carbon-market veteran told me. “It has nothing to do with the environment.”
To Sandor, these criticisms of CCX are, if not trivial, then at least beside the point. “At a certain level, all this becomes a debate about how many angels can dance on the head of a pin,” he told me. “In the larger scheme of things, they are meaningless. Global warming is an extremely urgent problem. Is CCX perfect? Of course not. Neither was the U.S. Constitution — they forgot the 10 amendments, including freedom of the press and freedom of speech. The important point here is that markets work to solve problems. The sooner we admit that, and the sooner we get around to building those markets, the better.”
Not long ago, at the University of Minnesota campus in Minneapolis, I was part of a standing-room-only crowd gathered in an auditorium to hear Sandor speak. He took the podium and charmed the audience with a mix of business savvy and social conscience. His message was one of hope and confidence and creativity, a response to the people he calls the Darth Vaders of the world — all those environmentalists, politicians and businessmen who think that global warming is too difficult an issue to tackle, who believe we have to wait longer and study it more before we do anything and, most of all, who are determined to make the perfect the enemy of the good.
If CCX were simply a giant eBay, there would be nothing to do but celebrate Sandor’s gumption and step back and see if his vision had wings. But creating a market for public goods is different from creating a market for Elvis memorabilia. Sandor is in the business of commodifying the air we breathe, and in that regard he is indeed a revolutionary, pushing the boundary between public and private and, in the process, raising new questions about what capitalism can and cannot do. It’s easy to see how a carbon market might be designed to enrich traders and investment banks; what is still far from clear is whether one can be designed that will significantly reduce greenhouse gas emissions. It may seem paradoxical, but the real lesson of CCX could turn out to be that markets may be wonderfully efficient systems, but they are no substitute for strong government action — both in setting the broad social goals of how to deal with global warming and, in the case of carbon markets, ensuring that the rules are not inclined in favor of private interests.
“Integrity is the linchpin to both public and investor confidence,” the emissions-trading pioneer Dan Dudek told me. “Without integrity, investors won’t commit serious capital either to generate the supply of reductions necessary for trading or to buy the reductions in the first place.”
Sandor doesn’t disagree. “This is just the beginning of a long journey,” he told me as we walked down the Minnesota campus steps after the speech. He was, as usual, in a hurry, his BlackBerry in hand, heading to California and Asia in the coming days. A black sedan waited at the curb. “I don’t pretend to have all the answers,” he said, reaching for the door. “I’m just a humble economist. All I want to do is solve the problem of global warming.”
Jeff Goodell, a frequent contributor to the magazine, is the author of “Big Coal: The Dirty Secret Behind America’s Energy Future.”
By JEFF GOODELL
The New York Times, July 30, 2006
Richard Sandor, chairman and C.E.O. of the Chicago Climate Exchange, seems to be fond of green. His business card and company stationery are trimmed in green; he wears green neckties. When he is photographed by the news media, there’s lots of green in the frame: green file folders, green paper, anything. For Sandor, it may be a way of signaling that the Chicago Climate Exchange — a commodities market for an unusual kind of commodity, greenhouse gas allowances — is more than just another business venture. It is, as he describes it, the engine of an environmental revolution.
But of course, green is also the color of money. And Sandor, who has been called “the father of financial futures” for his role in creating interest-rate futures in the 1970’s and who made a fortune during the boom years of the 80’s at Drexel Burnham Lambert, the firm of the junk-bond king Michael Milken, is also familiar with that particular shade. However high-minded in principle, the Chicago Climate Exchange is also about making a buck off the planet’s looming climate catastrophe.
Not that there’s anything wrong with that. In fact, the trading of greenhouse gas allowances, also known as carbon trading, may be capitalism’s best answer to the problem of global warming. To avoid a dangerous degree of climate change, many scientists say, greenhouse gas emissions worldwide will have to be cut by 50 to 70 percent over the next 50 years. The only hope of achieving that, short of an unforeseen technological breakthrough or the passage of draconian environmental laws, is to inspire radical change in the economic system. In a carbon-trading scheme, you must pay to pollute: price tags are placed on greenhouse gas emissions and then the market (not the government) essentially figures out the cheapest, most efficient way to reduce them. “The beauty of carbon trading,” Dan Dudek, chief economist at Environmental Defense, a nonprofit advocacy group, explained to me, “is that it takes a primal human impulse — greed — and redirects it toward saving the planet rather than destroying it.”
Last year, the European Union set up a carbon-trading scheme, the E.U. E.T.S. (Emission Trading Scheme), which, despite some recent problems in its teething stage, may reach $30 billion in market activity by the end of this year. Many economists speculate that a global carbon market could become the largest commodities market in the world. If the Chicago Climate Exchange were to become a major trading venue, as Sandor says he hopes it will, the commissions alone could be worth many millions.
For the time being, Sandor’s operation is somewhat more modest. The exchange, also known as CCX, opened for business in December 2003, after raising $25 million in a public offering on the Alternative Investment Market, a part of the London Stock Exchange. By May of this year, more than six million carbon allowances had been traded on the exchange, and the price for the allowances was hovering between $3 and $5 per metric ton of carbon dioxide. CCX now has more than 175 participants, including corporations like American Electric Power, Ford, Motorola, DuPont and I.B.M., as well as the state of New Mexico and six American cities, including Portland, Ore., and Oakland and Berkeley, Calif. Sandor says that in 2004, the members of CCX reduced carbon emissions by 30 million metric tons, roughly equivalent to the yearly emissions of two big coal plants. “CCX is growing,” the energy trading consultant Peter Fusaro told me recently, “but compared with mature exchanges like the New York Mercantile Exchange, the volumes are still minuscule.”
What makes CCX exceptional, despite its small size, is that it’s a private, voluntary endeavor. In Europe, the E.U. E.T.S. is a multinational, government-sanctioned project. The driving force behind the E.U. E.T.S. is a carbon-trading scheme that is built into the Kyoto Protocol, the 1997 international agreement on climate change, which committed industrialized nations to cutting greenhouse gas emissions by 5.2 percent from 1990 levels. (Kyoto’s emissions oversight is not scheduled to kick in until 2008, but last year the European Union set up the E.U. E.T.S. to help its members prepare for that eventuality.) By contrast, in the United States, which has not ratified Kyoto, there is no government-sanctioned carbon market.
Some analysts, including Sandor, contend that it’s just a matter of time before the United States adopts some sort of national emissions-trading scheme. Pressure is building on several fronts: environmentalists are demanding action on global warming, investment banks covet the arbitrage opportunities that a carbon market affords and international corporations seek long-term regulatory certainty. “I think it’s all but inevitable that a trading program will become the tool of choice for managing emissions in the U.S.,” Christine Todd Whitman, the former New Jersey governor and the administrator of the Environmental Protection Agency early in the Bush administration, told me recently. “It’s just a question of when and how the program will be designed.”
Several players are taking steps to design and implement trading schemes in the United States. In effect, they are jockeying for what economists call “first-mover status,” hoping to create the prototype for what might become a future national carbon market. A group of seven Eastern states have banded together to create a regional greenhouse gas initiative, known as R.G.G.I., which is scheduled to begin in 2009. In the West, a number of states, led by California, are considering a similar initiative.
And then there’s Sandor. No one has done more than he has to get a carbon market up and running in the United States. The World Resources Institute, a private environmental research group and an associate member of the exchange, has given Sandor an endorsement. “The Chicago Climate Exchange is an important experiment in reducing greenhouse gas emissions,” the institute’s president, Jonathan Lash, told me. Bill Richardson, the governor of New Mexico, whose state is a participant in CCX, suggests that Sandor’s project is here to stay. “I think the Chicago Climate Exchange is part of America’s future,” he said when I spoke with him. “We felt that the sooner we became a part of it, the better.”
But some observers are more wary. Mark Trexler, an industry consultant who is an advocate of emissions trading, told me that in Sandor’s rush to gain a foothold in this growing market, he may be undermining the integrity and effectiveness of the very system he presumes to advocate. It may be true that a market-based system is an indispensable means for combating global warming, but does it follow that an entrepreneur, no matter how well intentioned, can be trusted to design that system for the public good? “My fear is that if we aren’t rigorous enough in how we set up a trading system right now,” Trexler said, “we could end up discrediting trading as a tool to deal with global warming. If we’re not careful, people could get the idea that it’s all a fraud. And that would be a disaster, both for us and for the planet.”
On a recent morning, I visited Sandor in the CCX offices, which are housed in a skyscraper designed by Philip Johnson on LaSalle Street in Chicago. Sandor, who is 64, has a quick, practiced smile that suggests no lack of self-confidence. He speaks plainly and seriously about the dangers of global warming, though at times he can sound as if he’s trying to sell you something — which, of course, he is.
As we talked in his office, I noticed a green silicone band on his right wrist. It was similar to the yellow Live Strong wristband that Lance Armstrong popularized to support his fight against cancer. It struck me as odd, since Sandor didn’t seem to be a wristband sort of guy. I asked him about it.
“It’s a CCX wristband,” he explained. “I never take it off. Want one?”
He opened a drawer in his desk, took out a wristband in a plastic bag and handed it to me. I opened it and read the slogan on the band: “CCX — To Save the Planet.”
“That’s a big job,” I said, poking fun at the immodesty of the slogan. “You’re serious about this, aren’t you?”
“Very serious,” he said, stone-faced.
Sandor began his career as an academic, teaching economics at the University of California at Berkeley in the late 60’s. Inspired in part by a credit crunch that hit California in those years, he came up with the idea of interest-rate futures, a financial instrument that would allow banks and investors to hedge against future changes in interest rates. In 1972, he left academia and joined the Chicago Board of Trade as an economist. In 1982, he followed the financial boom to Wall Street, taking a job at Drexel, where he worked developing futures markets in insurance and other fields. By 1990, however, Drexel was in bankruptcy, and Sandor turned his attention elsewhere: to environmental problems and how market mechanisms might be used to solve them.
Sandor’s interest was sparked by the Environmental Protection Agency’s 1990 Acid Rain Program, which sought to reduce sulfur dioxide emissions from coal-burning power plants in the United States. The design of the program was ingenious but simple. Instead of trying to regulate sulfur dioxide emissions the usual way, by dictating a certain kind of emissions-control technology on each power plant, the E.P.A. employed what is known as a cap-and-trade program. The agency set an overall limit, or cap, on the amount of emissions permitted from all power plants combined. Then it allotted a certain number of pollution allowances to each emitter and let the operators of individual plants figure out how they wanted to proceed. A company might install scrubbers or switch to lower sulfur coal in order not to exceed its quota, but if the company determined that polluting beyond its quota was necessary, it could buy additional allowances from companies that had not used up their allotments. Companies that reduced their emissions could bank their credits for later use or sell them for a profit.
Fascinated, Sandor joined the E.P.A.’s Acid Rain Advisory Committee, which was charged with helping to implement the new law. Among other things, Sandor persuaded the E.P.A. to hold the annual auction for sulfur dioxide allowances on the exchange run by his former employer, the Chicago Board of Trade. In the end, the cap-and-trade program reduced pollutants more quickly, and far more cheaply, than anyone anticipated and became the model for market-based environmental success. Best of all, it helped transform the problem of reducing pollution from a moral issue into a pragmatic one.
Not long after the acid-rain program began, Sandor and other economists began thinking about how to apply the same market-based strategies to an even bigger problem, with an even bigger potential market: global warming. Whereas sulfur dioxide is a pollutant emitted from a measurable number of specific smokestacks, greenhouse gases, which are commonly measured in metric tons of carbon dioxide equivalent, are emitted from millions of diverse sources, including cars, jets, farm animal waste, factories and power plants. And unlike sulfur dioxide, which is a regional pollutant, greenhouse gases are a global problem: a metric ton of carbon dioxide emitted in Russia has the same impact on the atmosphere as a metric ton emitted in Ohio.
Despite these critical differences, in principle the same market-based approach could be used. First, set the overall limit of greenhouse gases that countries are collectively permitted to emit, then distribute (or auction off) allowances among various pollution sources within each country and sit back and watch the emitters trade those allowances as their needs and market strategies dictate. There would even be room for speculators to join in the market: if you think next summer is going to be a scorcher, you might buy up allowances on the theory that in hot weather, coal plants often run at maximum capacity to meet the power demand, dumping more carbon dioxide into the atmosphere and thus raising the demand (and the price) for carbon allowances.
A key innovation in the design of carbon markets was the idea of offsets. The basic concept was that polluters could earn emissions credits not only by cutting their own carbon emissions but also by assisting in efforts to reduce emissions from other sources elsewhere in the world: for instance, by paying farmers to reduce the emission of methane, a potent greenhouse gas, from animal waste. Another example of an offset was the so-called natural carbon sink — something like a forest, which absorbs carbon dioxide through photosynthesis. If you increase the absorption of carbon dioxide with plants, you create the same net effect on the atmosphere as cutting emissions from your car — so why not allow polluters to earn credits for, say, investing in reforestation?
The use of offsets also added the possibility for greater profits and speculation by carbon traders. For instance, if the price for carbon emissions credits is, say, $15 a metric ton, a company that can buy or lease land in Brazil and plant trees that will sequester carbon for the equivalent of $2 a metric ton stands to make a tidy sum by selling the credits it can generate.
Policy makers in the United States were excited by the idea of carbon trading, and during the mid-1990’s, American negotiators pushed hard to make sure the framework for a carbon-trading scheme was included in the Kyoto Protocol. Sandor, for his part, was eager to capitalize on a global carbon market and began dreaming up the idea for an all-electronic exchange for carbon trading. In 2000, with a $450,000 grant from the Joyce Foundation, a private organization with a history of financing environmental initiatives, he enlisted about 100 people — power-industry executives, environmentalists, lawyers — to study the feasibility of establishing a voluntary market in advance of what he assumed would eventually be a mandatory emissions-trading scheme in the United States. In theory, his market would give companies practice measuring and managing their greenhouse gas emissions, preparing them for life in a carbon-constrained world. It would also put him in a position to be the dominant trading platform when the American market opened in earnest.
Sandor’s first challenge was to recruit companies to join the exchange, and his ace in the hole was American Electric Power, or A.E.P. Sandor, it so happened, had joined A.E.P.’s board of directors at about the same time as the design process for CCX was getting under way. Not surprisingly, in 2000, A.E.P. enlisted in CCX and was joined by a number of other blue-chip corporations, including Ford and I.B.M.
In 2001, the Bush administration threw CCX a curve when it declined to ratify Kyoto. As a result, when CCX opened for business in 2003, it became virtually the only carbon-trading game in town for the foreseeable future. As with the trading scheme regulated by Kyoto, CCX brokers trades for credits of the six main greenhouses gases; its transactions are audited by N.A.S.D., a respected private securities industry regulator; and it has links to the E.U. E.T.S., where Sandor also runs an exchange. Unlike Kyoto, however, CCX has no teeth: it is an entirely private effort. In the first full month of trading on CCX, credits for about 82,000 metric tons of greenhouse gases swapped hands at a price of about $1 per metric ton. “It was a little like the Wright brothers at Kitty Hawk,” Sandor told me. “Nobody believed it would fly. But it did. Maybe not elegantly at first, but it flew.”
Not everyone was so upbeat about CCX. When the exchange first began recruiting companies to join and soliciting environmental groups for endorsements, several of those groups started to have reservations. The Natural Resources Defense Council and Environmental Defense kept their distance. The Nature Conservancy consulted on the rules for CCX’s forestry offsets but did not join the exchange. The concern, several members of these groups told me, was that the initial design of CCX was too industry-friendly. Of its participating emitters, CCX required emissions reductions of just 1 percent a year during the market’s first phase, from 2003 to 2006. (This was far more modest than even the gentle cuts mandated under Kyoto.) CCX’s trading scheme threatened no explicit penalties for companies that missed their targets; in fact, a provision was included in the exchange’s rule book stating that emissions more than 4 percent over a company’s baseline (today it’s 7 percent) would not even be counted. Finally, the rules that governed the use of offsets, critics said, were lax. “Clearly, the initial goal was to make it as painless as possible for companies to sign up,” the industry consultant Mark Trexler told me. “If you’re designing a voluntary system, it’s hard to do it any other way.”
Despite the claim that industry had a strong influence on the design of CCX, many of the biggest emitters — including companies with solid environmental credentials, like BP, the global oil and gas conglomerate, and Cinergy, the Midwestern electric-power company — declined to sign on. There were a variety of reasons given for this, but one of the most important issues very likely concerned something called the emissions baseline. In any trading scheme, picking a baseline — the point from which emissions increases and reductions are measured — is controversial. In the Kyoto Protocol, for instance, all reductions are measured against a baseline of emissions levels in 1990. For its baseline, CCX decided to use an average of emissions from 1998 to 2001. As it happened, one of the big nuclear plants of A.E.P. was mostly shut down during those years, meaning that A.E.P. had to burn more coal to make up for it, presumably inflating its carbon dioxide emissions. Thus, the choice of an artificially high 1998-2001 baseline was a benefit to A.E.P. (on whose board Sandor sits), since it could more easily remain below it.
Bruce Braine, vice president for strategic policy analysis at A.E.P. and a CCX board member, told me that “the question of establishing baselines is always difficult. No matter how you choose to set them, someone complains that it’s unfair.” But as I was told by one former executive for CCX, who was granted anonymity because the executive was not authorized to discuss CCX’s internal matters, “other big emitters had no interest in joining a program that seemed designed to help A.E.P. look like a good corporate citizen.”
In the three years that CCX has been in operation, criticisms from environmentalists have only grown. This is particularly the case with CCX’s standards for using agricultural offsets, in which carbon is sequestered in farmland soils and then sold for emissions credits. Agricultural offsets are notoriously difficult to measure and quantify, and a less-than-rigorous program is essentially a way of introducing overvalued emissions allowances into the trading system. Advocates of carbon trading like Environmental Defense have worked hard to develop stringent protocols for soil sequestration, while others, like David Doniger, the climate policy director at the Natural Resources Defense Council, remain skeptical of the whole concept. “The problem with these kinds of offsets is that we’ve never found a way to separate the wheat from the chaff,” Doniger told me. “There is a constant tension between quality control and high participation rate. And it’s usually quality that goes in the toilet.”
To check this out for myself, on a rainy afternoon this spring I drove a few hours southwest of Omaha to visit Steve Wiese, a 51-year-old farmer who earns extra money by sequestering carbon on his 2,500-acre farm and selling the carbon allowances on CCX. When I arrived, Wiese was going over some paperwork in his barn. On his desk was a check for $2,008.94. “It just came in the mail the other day,” Wiese said, waving it happily.
Wiese, like hundreds of other farmers who are getting paychecks from carbon emitters by way of CCX, practices a form of cultivation known as no-till. Instead of tearing up the fields each spring and releasing the carbon stored in the soil (mostly in the form of decomposing plant matter and roots), no-till farmers plant right over the previous year’s crop, leaving the soil undisturbed.
“How long have you been no-tilling?” I asked him.
“About 14 years,” he said, leaning back in his chair.
“How long have you been getting paid by CCX?”
“Just signed up last year,” he said.
Here was an instance of a major problem that critics of CCX have raised: Wiese is getting paid for storing carbon in his soil, even though he has done nothing to increase the amount of carbon that is being stored on his land — he’s just doing exactly what he’s been doing for the last 14 years. A polluter like A.E.P. or Ford can use a credit from Wiese’s farm to offset their greenhouse gas emissions, but the fact is, in cases like these the payments from CCX are having no net effect on the level of greenhouse gases in the atmosphere.
And Wiese is hardly alone. Of the half-dozen farmers I spoke to in Nebraska and Iowa, all had started no-tilling before they ever received a check from CCX. When I asked Sandor about this, he argued that it doesn’t matter if these agricultural reductions are “real” or not, because they make up only a small fraction of CCX’s overall reductions. “What’s important,” he told me, “is to incentivize people who are doing the right thing. I think of these payments as a kind of ‘tickler.’ ” To critics like Doniger, though, the problem is that Sandor doesn’t advertise these kinds of offsets as a “tickler” — he advertises them as actual improvements in the atmosphere.
Environmentalists have also raised questions about another aspect of CCX: how it calculates emissions reductions. Sandor regularly notes that CCX members reduced carbon emissions by 14 million metric tons in 2003 and 30 million metric tons in 2004. (2005 numbers aren’t available yet.) That is, of course, a good thing. But it’s not clear that CCX should get the credit.
Consider the case of DuPont. Overall, DuPont’s carbon dioxide emissions are down 72 percent since 1990 — an example, according to Edwin Mongan, the director of energy and environment at DuPont, of “what a company can do if it sets its mind to it.” DuPont has beat its CCX baseline by more than 50 percent, cutting emissions by 8 million metric tons more than required. “We’re supportive of CCX because it has given us experience trying out selling, working in a carbon market,” Mongan told me. But he also suggested that being a member of CCX has not, in itself, led to reduced emissions. “I think CCX has been most valuable to us in helping to certify and validate the emissions cuts that we’ve already made,” he said.
The fact that companies like DuPont are reducing their carbon emissions does not mean that the emissions reductions trumpeted by CCX are necessarily unreal. But it may mean that these reductions are mostly the result of good corporate citizenship, not the power or efficiency of Sandor’s market.
Unfortunately, sorting out the real from the unreal is not always easy with CCX projects. It was precisely this difficulty that bothered David Littell, the commissioner of Maine’s Department of Environmental Protection, when he heard a pitch from CCX in 2004. At the time, CCX had approached a number of states about joining the exchange. Maine, which was among the first states to take progressive action on global warming, was a coveted recruit for CCX. Littell told me that he and other state administrators were “generally supportive” of CCX’s goals but had concerns that the exchange “was a system set up by private entities, with private transactions, set up to ensure confidentiality.” Why was this a problem? “It creates an appearance that the emission reductions might not be enforceable and verifiable,” Littell told me. Like several other Eastern states that were courted, Maine didn’t sign up.
Instead, Littell is now concentrating on the creation of R.G.G.I., the regional greenhouse gas initiative that also involves Connecticut, Delaware, New Hampshire, New Jersey, New York and Vermont. Unlike with CCX, which was devised essentially behind closed doors by a group of corporations, the creation of the rules for R.G.G.I. has been open and transparent, with dozens of public meetings and ample time for all stakeholders — environmentalists, industrialists, politicians, citizens — to comment on the program’s design. As a result, the program is proceeding cautiously; for instance, instead of allowing a wide variety of offsets, as CCX does, the R.G.G.I. program will begin with a limited set of five categories of offsets (including collecting methane from landfills) and does not include the controversial agricultural offsets. “We believe public confidence in the program is vital,” Franz Litz, of the New York State Department of Environmental Conservation, told me.
If CCX has such troubling flaws, why has it attracted so much support, particularly in corporate America? One explanation, provided by Sandor and others who endorse CCX, is that by joining CCX, companies get valuable experience managing emissions in a functioning market. In addition, of course, there is the public-relations benefit that goes along with being part of an enterprise that is widely viewed as part of the solution, not part of the problem.
But what’s going on here may be more complicated than that, and it has to do with that other shade of green. The logic goes like this: in a few years, if a mandatory carbon-trading system is finally established in the United States, one of the most contentious issues in the design of that system will be how companies that have already made reductions in their emissions will be credited for those reductions — if indeed they are credited at all. In other words, should a company like DuPont or I.B.M., both good corporate citizens that have already made sizable cuts in emissions, be required to reduce greenhouse gas emissions just as much as a competitor who has done nothing? If they do get credit for those early reductions, how might that credit be measured? For DuPont and I.B.M., hundreds of millions of dollars could be at stake in how this question is resolved.
With CCX, Sandor has effectively played this uncertainty to his advantage. The bigger CCX gets, the more cities and states it can get to join, the more likely it will be that carbon credits on the exchange will be viewed as the de facto standard by politicians and others responsible for designing a national system — and the more likely it will be that credits on the exchange, which at the moment are only informally recognized among CCX participants, will be grandfathered into a national system and granted full legal status as property rights. “This is all about business,” one carbon-market veteran told me. “It has nothing to do with the environment.”
To Sandor, these criticisms of CCX are, if not trivial, then at least beside the point. “At a certain level, all this becomes a debate about how many angels can dance on the head of a pin,” he told me. “In the larger scheme of things, they are meaningless. Global warming is an extremely urgent problem. Is CCX perfect? Of course not. Neither was the U.S. Constitution — they forgot the 10 amendments, including freedom of the press and freedom of speech. The important point here is that markets work to solve problems. The sooner we admit that, and the sooner we get around to building those markets, the better.”
Not long ago, at the University of Minnesota campus in Minneapolis, I was part of a standing-room-only crowd gathered in an auditorium to hear Sandor speak. He took the podium and charmed the audience with a mix of business savvy and social conscience. His message was one of hope and confidence and creativity, a response to the people he calls the Darth Vaders of the world — all those environmentalists, politicians and businessmen who think that global warming is too difficult an issue to tackle, who believe we have to wait longer and study it more before we do anything and, most of all, who are determined to make the perfect the enemy of the good.
If CCX were simply a giant eBay, there would be nothing to do but celebrate Sandor’s gumption and step back and see if his vision had wings. But creating a market for public goods is different from creating a market for Elvis memorabilia. Sandor is in the business of commodifying the air we breathe, and in that regard he is indeed a revolutionary, pushing the boundary between public and private and, in the process, raising new questions about what capitalism can and cannot do. It’s easy to see how a carbon market might be designed to enrich traders and investment banks; what is still far from clear is whether one can be designed that will significantly reduce greenhouse gas emissions. It may seem paradoxical, but the real lesson of CCX could turn out to be that markets may be wonderfully efficient systems, but they are no substitute for strong government action — both in setting the broad social goals of how to deal with global warming and, in the case of carbon markets, ensuring that the rules are not inclined in favor of private interests.
“Integrity is the linchpin to both public and investor confidence,” the emissions-trading pioneer Dan Dudek told me. “Without integrity, investors won’t commit serious capital either to generate the supply of reductions necessary for trading or to buy the reductions in the first place.”
Sandor doesn’t disagree. “This is just the beginning of a long journey,” he told me as we walked down the Minnesota campus steps after the speech. He was, as usual, in a hurry, his BlackBerry in hand, heading to California and Asia in the coming days. A black sedan waited at the curb. “I don’t pretend to have all the answers,” he said, reaching for the door. “I’m just a humble economist. All I want to do is solve the problem of global warming.”
Jeff Goodell, a frequent contributor to the magazine, is the author of “Big Coal: The Dirty Secret Behind America’s Energy Future.”
posted by The Poster | 9:18 AM
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Carbon Offsets Sins of Emission
Carbon offsets Sins of emission
Aug 3rd 2006
From The Economist print edition
The idea of offsetting carbon emissions is sound in theory, if not yet in practice
THE sale of indulgences by the Catholic church in the early 16th century, whereby people could, in effect, purchase forgiveness of past sins by handing over enough money, was condemned by Martin Luther and other reformers. Today, some environmentalists are denouncing the “offsetting” of carbon emissions in similar terms. A company that wants to declare itself “carbon neutral” calculates how many tonnes of carbon it emits, and then offsets the emissions by paying someone else not to emit that amount of carbon on its behalf. Just as Luther criticised indulgences, critics of offsetting argue that the ability to buy retrospective forgiveness for sins of emission is no substitute for not sinning in the first place.
Carbon offsets have two main purposes. One, as with indulgences, is to assuage guilt. Carbon offsetting allows consumers to quell their eco-guilt even as they jet off to distant climes on holiday, and drivers of sports-utility vehicles to argue that they have atoned for the emissions produced by their gas-guzzling cars. A second purpose is image-polishing: companies that declare themselves carbon neutral may well have public-relations as well as environmental benefits in mind.
To fulfil those purposes, carbon offsets do need to reduce carbon emissions. Existing schemes are far from perfect. One popular sort involves planting trees, which remove carbon from the atmosphere as they grow; but this approach is now somewhat discredited, since the carbon may be released again when the trees are cut down. Another problem with offset schemes is the lack of standards: can you really trust those who promise to eliminate emissions elsewhere on your behalf? Then there is the problem of “additionality”: would the emissions in question have been eliminated anyway, or is the reduction additional? Since offsetting is done on a voluntary basis, unlike the mandatory carbon-trading systems that have been imposed on some industries in some countries, such doubts may put people off doing it altogether. After all, only wide-ranging, compulsory schemes will make a real difference in reducing emissions and minimising climate change; the odd bit of offsetting here and there will not.
Despite such flaws, however, the idea of carbon offsets is a good one. Establishing markets in which carbon emissions can be traded and offset is a good idea, since market forces then provide financial incentives for people to find the cheapest ways to reduce or eliminate emissions. The lack of standards is also being addressed. Various bodies are creating standards and inspection regimes that will allow buyers of carbon offsets to feel confident that they really are getting what they pay for (see article). And many firms are embracing voluntary offsetting now in the expectation that compulsory carbon trading will soon be imposed upon them anyway.
The right way to not do something
Yet as the nascent carbon-offsetting industry starts to take shape, a new problem is emerging. Some of the non-governmental organisations that are drawing up carbon-offset standards require emissions to be cut in particular ways: after due consultation with local people, for example, or using particular favoured technologies. Such considerations are irrelevant: the only thing that should matter in offset schemes is that emissions should be cut. Politicising offsets risks discrediting an approach that deserves to be taken seriously. And that really would be a sin.
Aug 3rd 2006
From The Economist print edition
The idea of offsetting carbon emissions is sound in theory, if not yet in practice
THE sale of indulgences by the Catholic church in the early 16th century, whereby people could, in effect, purchase forgiveness of past sins by handing over enough money, was condemned by Martin Luther and other reformers. Today, some environmentalists are denouncing the “offsetting” of carbon emissions in similar terms. A company that wants to declare itself “carbon neutral” calculates how many tonnes of carbon it emits, and then offsets the emissions by paying someone else not to emit that amount of carbon on its behalf. Just as Luther criticised indulgences, critics of offsetting argue that the ability to buy retrospective forgiveness for sins of emission is no substitute for not sinning in the first place.
Carbon offsets have two main purposes. One, as with indulgences, is to assuage guilt. Carbon offsetting allows consumers to quell their eco-guilt even as they jet off to distant climes on holiday, and drivers of sports-utility vehicles to argue that they have atoned for the emissions produced by their gas-guzzling cars. A second purpose is image-polishing: companies that declare themselves carbon neutral may well have public-relations as well as environmental benefits in mind.
To fulfil those purposes, carbon offsets do need to reduce carbon emissions. Existing schemes are far from perfect. One popular sort involves planting trees, which remove carbon from the atmosphere as they grow; but this approach is now somewhat discredited, since the carbon may be released again when the trees are cut down. Another problem with offset schemes is the lack of standards: can you really trust those who promise to eliminate emissions elsewhere on your behalf? Then there is the problem of “additionality”: would the emissions in question have been eliminated anyway, or is the reduction additional? Since offsetting is done on a voluntary basis, unlike the mandatory carbon-trading systems that have been imposed on some industries in some countries, such doubts may put people off doing it altogether. After all, only wide-ranging, compulsory schemes will make a real difference in reducing emissions and minimising climate change; the odd bit of offsetting here and there will not.
Despite such flaws, however, the idea of carbon offsets is a good one. Establishing markets in which carbon emissions can be traded and offset is a good idea, since market forces then provide financial incentives for people to find the cheapest ways to reduce or eliminate emissions. The lack of standards is also being addressed. Various bodies are creating standards and inspection regimes that will allow buyers of carbon offsets to feel confident that they really are getting what they pay for (see article). And many firms are embracing voluntary offsetting now in the expectation that compulsory carbon trading will soon be imposed upon them anyway.
The right way to not do something
Yet as the nascent carbon-offsetting industry starts to take shape, a new problem is emerging. Some of the non-governmental organisations that are drawing up carbon-offset standards require emissions to be cut in particular ways: after due consultation with local people, for example, or using particular favoured technologies. Such considerations are irrelevant: the only thing that should matter in offset schemes is that emissions should be cut. Politicising offsets risks discrediting an approach that deserves to be taken seriously. And that really would be a sin.
posted by The Poster | 9:17 AM
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