Editorial on Emissions Trading ,
 From yesterday's Washington Post.  Please see highlighted section on OPG. =
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Trading Futures in Dirty Air=20
Here's a Market-Based Way to Fight Global Warming=20
By Ricardo Bayon

Sunday, August 5, 2001; Page B02=20
Gary Payne and Jeremy Taylor are two Wall Street types who work for trading=
 companies in, respectively, Kansas City and Houston. Their daily routine i=
s familiar to speculative traders everywhere: They wake up early to get a j=
ump on the markets, read the industry papers, take a look at their companie=
s' trading portfolios, and log onto their Bloomberg terminals to see who's =
buying and who's selling. But they do not trade in stocks, bonds, currencie=
s or even pork bellies. Instead, what Payne and Taylor trade is the right t=
o pollute -- specifically, the government-given right to emit sulfur dioxid=
e (SO2) and nitrogen oxides, the two gases chiefly responsible for acid rai=
n.
In a classic example of doing well by doing good, successful traders such a=
s Payne and Taylor buy pollution credits low, sell them high and make money=
 -- all the while playing an integral role in a system that has reduced ann=
ual emissions of SO2 by U.S. utilities by 29 percent since 1990. Their expe=
rience offers a valuable lesson for U.S. policy makers seeking solutions to=
 the problem of global climate change. The sulfur dioxide market provides a=
 business-friendly, market-oriented, cost-effective model for reducing emis=
sions of carbon dioxide, the gas generally considered to be the main culpri=
t behind global warming.=20
The market is based on the same theory as the country-to-country emissions =
trading program envisioned in the Kyoto Protocol signed by 178 countries an=
d rejected by President Bush. But the president should not be put off by th=
is. Pollution-credit trading is an inherently capitalist approach to the gl=
obal warming problem that can be set up nationally (or regionally, with Can=
ada and Mexico) and can be tailored to U.S. needs.=20
Perhaps the administration needs to be reminded of the successes of the SO2=
 program. It was created to combat acid rain, one of the major environmenta=
l issues of the 1980s. Acid rain is caused when sulfur dioxide and nitrogen=
 oxides are emitted into the atmosphere, mostly by power generators. In 199=
0, Congress amended the Clean Air Act to set national targets for emissions=
 of those gases; it then instructed the Environmental Protection Agency (EP=
A) to allocate the rights to these limited emissions among major U.S. utili=
ties, and to create a mechanism for the utilities to buy and sell those rig=
hts. Note that the government did not tell utilities how to reduce their em=
issions of SO2. It merely set targets and let the market determine how best=
 to achieve this goal. So, under the EPA plan, a power plant that was emitt=
ing too much sulfur dioxide had several options: It could install less poll=
uting technology, it could switch its fuel from coal to natural gas (which =
produces less SO2), or it could purchase excess emission credits from anoth=
er utility. A utility that upgraded its technology or switched fuels might =
even cover some of the costs by selling emission credits it no longer neede=
d.
Trading in sulfur dioxide rights got fully underway in 1995 (and in nitroge=
n oxides some years later). Today, the right to emit SO2 sells for around $=
200 a ton and is sold in lots of 2,500 tons, which means it is available to=
 anyone with half a million dollars to spare. The big buyers and sellers ar=
e utilities and energy companies, but there are exceptions. The venerable W=
all Street brokerage firm Cantor Fitzgerald once helped a wealthy benefacto=
r purchase the right to emit one ton of SO2 as a wedding present for a pair=
 of environmentalists; and it brokered a deal for an environmental group th=
at wanted to give its retirees emission rights instead of gold watches.=20
Taylor, who tracks the market closely, says that in the past year about $66=
8 million worth of SO2 credits changed hands. He points out, however, that =
if the trading in SO2 options and futures is included, the total market is =
several times that size. "You can buy SO2 puts, calls, straddles, call spre=
ads, whatever you need," he says.=20
And this robust and liquid market is not just profitable; it also has been =
remarkably effective at controlling acid rain. According to the EPA, which =
tracks the emissions of 263 of the largest power plants in the country, the=
y emitted 8.7 million tons of SO2 in 1990, when Congress first mandated a c=
ap. That figure dropped to 7.4 million tons by 1994. But in 1995, when trad=
ing in SO2 credits began, emissions plummeted to 4.5 million tons, even tho=
ugh power generation continued to increase. In the Northeast and Mid-Atlant=
ic regions of the United States, where acid rain and lake acidification wer=
e particularly problematic, acid rain levels declined by 25 percent between=
 1995 and 1999.=20
The cost to businesses of this environmental benefit was barely more than a=
 tenth of what had originally been predicted. Before Congress mandated the =
sulfur dioxide cap, the Edison Electric Institute estimated that it would c=
ost $7.4 billion a year for industry to meet its targets; over the ensuing =
decade, successive studies by a variety of groups have shown that the real =
figure is likely to be closer to $870 million a year.=20
In other words, the SO2 market is doing what markets do best: It has wrung =
inefficiencies out of the system and allocated scarce resources (in this ca=
se, pollution rights) very cost-effectively.=20
Markets can do the same thing for carbon dioxide. But this will require of =
President Bush and Congress at least one act of political courage: They wil=
l need to cap CO2 emissions. Bush pledged to do so during his 2000 campaign=
, but later reversed his stance. Now he would have to reverse the reversal =
-- but he can find inspiration in his father, the first President Bush, who=
se administration launched the successful SO2 trading program.
Besides, the gesture might not be as difficult as it looks -- because when =
it comes to greenhouse gases, business is way ahead of government. A quiet =
"gray market" already exists in carbon dioxide. Individual companies, expec=
ting some kind of government regulation in the not-too-distant future, have=
 been buying and selling CO2 credits for more than three years.=20
"If you are a large power company spending millions of dollars building pla=
nts that you expect to operate for 20 or 30 years," says CO2 trader Carlton=
 Bartels, "you are not happy when government comes along and tells you not =
to worry about global warming, at least not for the next four years. That d=
oesn't decrease the risks your company faces as a result of climate change.=
 It may actually increase them."=20
Bartels is chief executive officer of CO2e.com, a carbon dioxide trading fi=
rm that was spun off from Cantor Fitzgerald six months ago. The new company=
 helps businesses prepare for what Bartels calls the inevitable "carbon-con=
strained" future -- when public pressure will force governments to regulate=
 emissions of the gases that cause climate change.=20
In the meantime, CO2e.com is busy arranging trades for companies that want =
to stay ahead of the curve. For example,Houston-based Petro Source Carbon C=
o. has constructed a pipeline that takes the carbon dioxide produced by fou=
r U.S. power plants and pumps it into new oil wells in west Texas, where it=
 enhances oil recovery. Since the CO2 it uses would otherwise be vented int=
o the atmosphere, Petro Source figures it will have carbon credits to spare=
 if and when the United States puts a cap on CO2 emissions. Meanwhile, Onta=
rio Power Generation of Toronto, whose plants emit carbon dioxide, expects =
Canada to institute a similar cap. In a deal brokered by CO2e.com, Ontario =
Power recently bought 1.3 million tons of Petro Source's credits. Both part=
ies expect their governments to honor the deal in the future.=20
Bartels estimates that in its short lifetime, CO2e.com has been involved in=
 trades for the equivalent of 3.5 million tons of CO2 emissions rights, eac=
h ton selling for between $1 and $5a ton. (A ton of carbon dioxide is much =
cheaper than a ton of sulfur dioxide, in part, because trade in CO2 is stil=
l highly speculative. If governments institute CO2 emissions caps, these pr=
ices should skyrocket.) Even before CO2e.com was created, he said, Cantor F=
itzgerald helped move between 20 million and 30 million tons of CO2 emissio=
ns rights.
By the end of this decade, Bartels believes that the CO2 market could be wo=
rth tens of billions of dollars. "Given the amount of global emissions," he=
 says, "this could become the largest commodity market in the world."=20
As President Bush seeks a coherent policy on climate change, he would do we=
ll to realize that Wall Street, power companies and emissions traders have =
for years been sitting on an elegant -- not to mention profitable -- soluti=
on to his problems. The 1980s may have taught us that greed is not always g=
ood, but the decade to come is likely to show that it can sometimes be gree=
n.
Ricardo Bayon is a fellow of the New America Foundation, a nonpartisan thin=
k tank based in Washington.
? 2001 The Washington Post Company=20


Lisa Jacobson
Enron
Manager, Environmental Strategies
1775 Eye Street, NW
Suite 800
Washington, DC 20006

Phone: +(202) 466-9176
Fax: +(202) 331-4717
jeffrey.keeler@enron.com, trevor.woods@enron.com, e.taylor@enron.com, 