Save The Planet, Lose The Guilt

A Market For Carbon
Both candidates for U.S. president have come out in favor of a carbon-trading scheme to provide a free-market incentive to reduce the production of greenhouse gases. Under these "cap and trade" arrangements, governments impose limits on the amount of carbon that factories or companies are allowed to emit, and require those who want to exceed the limit to buy "carbon credits." Since 2005, developed countries like Australia and Canada have had mandatory markets in place, and the European Union has been trading carbon credits since 2002 under its voluntary pilot program. Since the United States hasn't ratified the Kyoto agreement, carbon is traded instead on the Chicago Climate Exchange (CCX), currently the world's only voluntary carbon-credit market.

Evidence that even Europe's highly regulated scheme is working is weak at best. One idea behind the United Nations' Clean Development Mechanism (CDM), the program the EU and others that have ratified Kyoto are following, is that industries from countries like France and Britain will pay their counterparts in India and China to emit less carbon, financing technologies that allow them to build more-efficient factories. The problem is that even those developing countries that have ratified Kyoto aren't expected to reduce their emissions, which means there's nothing to stop a company's taking money from the CDM to close down a polluting factory and using it to build another one. Gujurat Fluorochemicals, an Indian company, made €27 million in the last three months of 2006 (triple its total company earnings over the year before) in large part from the sale of carbon credits to Europe. The boost in profits, experts say, likely helped to fund its construction of a new plant to make Teflon and caustic soda, which are both pollutants. (Gujurat Fluorochemicals couldn't be reached for comment.) In short, oversight is poor. "There's a lot for us to learn," says Dan Esty, an environmental-law professor at Yale University. "Most notably, we need to have a market that has much greater auditing and the certification to really make sure that money is well spent and projects are authentic and verified."

The U.S. market, being voluntary, has been selling its carbon credits far too cheaply—for $3 to $5 per ton—compared with the CDM, where credits trade for 10 times more. The discrepancy is due to lax standards that don't comply with international agreements. Projects (such as reforestation) that are considered legitimate offsets on the CCX are not recognized in Europe; with more credits available and less of a demand for them, they're selling cheap. Still, the U.S. Congress in November announced that it was going to become carbon-neutral by buying enough offsets on the CCX to negate the impact the roughly 30,000 metric tons of carbon emitted annually by its antiquated coal-burning power plant. At $2.97 per ton, Congress spent nearly $90,000 on offsets that included planting trees, underground storage of carbon dioxide, and wind and solar power. But a subsequent audit found that a number of the projects would have happened regardless of whether the offsets had been purchased or not. For example, farmers in North Dakota, who were paid to till their land in a way that traps carbon underground, told a Washington Post reporter that they would have worked this way even without offsets.

It could take years to hammer out an effective carbon-trading scheme. "If we're going to be serious, we have to put that market into a real regulatory structure, with mandatory emissions reductions," says Esty. The voluntary market in the United States, for instance, "does not have any degree of regulations, and as a result it's more or less just practicing for the real deal to come."

Lesson: Carbon trading could work, but only if participation is mandatory and regulatory oversight is strict.

Gasoline Substitute
Several studies and spiking food prices have debunked the belief that ethanol, made from fermenting crops, is a green substitute for gasoline. Ethanol fell from grace because it yields at most only a third more energy than it takes to produce. The search is now on for more-efficient, nonfood sources of biofuels like jatropha and sugar cane. One promising candidate is cellulose, a substance found in agricultural waste.

About 20 firms in the United States are trying to derive ethanol from waste crops. The Department of Energy has earmarked $385 million over four years for six private firms. One of them, BlueFire Ethanol, is building a pilot plant in California alongside a landfill, which supplies cellulose. Firms like BP, GM and DuPont are making exploratory investments. Verenium, an independent firm, last month opened a small plant that uses bagasse, a byproduct of sugar cane.

Cellulose is especially appealing because it is derived from waste, but it's unclear exactly what type of waste will work best on a commercial scale. As a result, investors are cautious. "A lot of money is sitting on the sidelines," says University of Illinois researcher Dr. Chris Somerville. "The potential is big enough to see deep investments."

Lesson: Finding a world-beating new biofuel quickly will take lots of money and the nerve to lose some of it.

© 2008