Carbon trading a big and growing business

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CARBONTRADING (Green, Pittsburgh Post-Gazette) -- The global market for carbon trading is booming. But what is it? 700.While recent months have seen a global contraction in both debt and equity markets, at least one financial market has been booming this year, a market that scarcely existed five years ago.The global market for "carbon trading" grew 36 percent between January and September, to $84 billion from $67 billion, according to New Energy Finance, a London-based company that tracks activity in energy markets. By year's end, the market is expected to surpass $100 billion.But what is carbon trading?To begin with, carbon trading does not mean trading carbon. What is being traded are credits for greenhouse gases, with carbon dioxide being first among them.Here's how the trading works:In its most basic form, a carbon market consists of participants who agree to a baseline for carbon emissions. Say that two companies each have a manufacturing plant that emits 10 tons of carbon during the course of a year. As members of the market, they agree to reduce their emissions by 10 percent, to 9 tons of carbon. "Company A" has more cash on hand and begins retooling its plant. In two years, it manages to reduce its emissions, not to 9 tons, but to 8.5 tons. Company A then receives a credit for the amount by which it exceeded the required reduction, or one-half a ton.Company B, meanwhile, not being as flush with cash as Company A, is moving more slowly than its counterpart. At the end of two years, it has reduced the emissions at its plant to 9.5 tons, a half-ton more than the agreement allows. It is still working toward that 9-ton mark, but in the meantime, it can bring itself into compliance by buying Company A's half-ton credit.So, Company A has made money, Company B has gained breathing room to continue its retooling, and the overall goal, average emissions of 9 tons per member, has been achieved.The primary U.S. marketplace for carbon trading is the Chicago Climate Exchange, launched in December 2003 by Richard Sandor, the economist and entrepreneur widely credited with creating financial futures. The instrument of exchange is the CCX Carbon Financial Instrument, or CFI.Each CFI represents 100 metric tons of carbon dioxide, or its equivalent (the market includes five other greenhouse gases: methane, nitrous oxide, sulfur hexafluorides, perfluorocarbons and hydrofluorocarbons).The exchange has some 350 members, including more than 10 percent of the Fortune 100 firms and eight cities, Sandor said. Members make a legally binding agreement to reduce their emissions from year 2000 levels."In 2006, they were supposed to have reached a 4-percent reduction, but they have actually reduced them by 11 percent," Sandor said. The reduction in industrial emissions, 180 million tons, approximates the yearly emissions of France and Belgium combined, he added.Carbon trading is not without its critics. Some say that it is just a shell game that allows excessive polluters to burnish their reputations without changing their ways. A recent Wall Street Journal article described how some landfills have earned and sold credits for capturing methane -- something that they were already doing in order to sell the gas as a fuel.Still, New Energy projected that the carbon market would continue to grow -- to $500 billion by 2012, and $3 trillion by 2020.Underlying that prediction is a growing embrace of carbon trading, not only by more companies, but also by more government leaders. In February 2007, the governors of Arizona, California, New Mexico, Orgeon and Washington signed off on the Western Regional Climate Action Initiative, a pledge "to collaborate in identifying, evaluating and implementing ways to reduce GHG emissions in our states."They have since been joined by the governors of Montana and Utah, and the Canadian premiers of British Columbia, Manitoba, Ontario and Quebec. The focus of the initiative is the development of a market-based cap-and-trade system with the additional muscle of government behind it.Also, 10 Northeastern and Mid-Atlantic states have joined forces to create the nation's first mandatory carbon trading system, the Regional Greenhouse Gas Initiative.Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont have each established state regulations requiring power companies to reduce their carbon dioxide emissions by 10 percent by 2018. Under the initiative, credits generated in any state can be traded in any other member state.E-mail Elwin Green at egreen(at)post-gazette.com.(Distributed by Scripps Howard News Service, www.scrippsnews.com.)