Oct. 19, 2006, 1:18PM
SAN FRANCISCO — With California and most Northeast states laying the ground rules for markets as a means of combating global warming, are U.S. greenhouse gas credits a good investment now?
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Probably, if you find the right kind. The basic idea is to find credits for voluntarily reducing greenhouse gases today that are likely to be recognized under future mandatory cuts.
"Until now, it hasn't made sense to speculate because you didn't know what the rules will be," said Dale Bryk, an attorney at the Natural Resources Defense Council, who has advised states on using a market to reduce emissions.
In the Northeast at least, "Now you could make an investment and you wouldn't be an idiot," said Bryk. "You have a lot of information."
The U.S. greenhouse gas market has been trading credits mostly from projects that absorb greenhouse gases, like planting trees or capturing gas at landfills. Companies choosing to be environmentally responsive and speculators have been buying the credits for these projects, called "offsets." Also, many companies that physically reduce their emissions have been verifying and registering their voluntarily efforts, though credits for these reductions generally don't get traded.
The Northeast states and California will reward some of these voluntary early actions when they begin issuing limited allowances to emit greenhouse gases _ primarily carbon dioxide _ in 2009 and 2012. That is, companies that don't physically cut emissions enough under the mandatory laws will be able to cash in credits for early reductions to make up the difference. Some credits might also be recognized when expected federal greenhouse gas emission cuts are in place, and some might even become viable for trade in the international markets developed around carbon emission rules adopted by countries that signed on to the Kyoto Treaty.
"Several hedge funds trade carbon," said Peter Fusaro, co-principal at Energy Hedge Fund Center in New York. "Everyone anticipates a carbon regime in the U.S. _ the question is when." But he added that, "the value of the credits in voluntary markets is problematic."
From an investment perspective, the risk is that credits for most early reductions probably won't be accepted in coming mandatory systems. Their market values are likely to plummet regardless of the environmental improvements the credits represent.
As a result, prices for U.S. voluntary credits vary from $1 a ton of carbon dioxide to $6 a ton, based on the year the reduction took place, the location and type of project involved, and other factors, said Jason Patrick, a greenhouse gas broker for Evolution Markets in New York.
"Prices are all over the place in the voluntary market," said Patrick. "There's no such thing as a price of a California carbon credit."
Still, compare the range to prices under mandatory emission reductions. In Europe, greenhouse gas allowances for 2008 trade for about $20 a ton. A federal bill mandating emission cuts written by Sen. John McCain, R-Ariz., and Sen. Joseph Lieberman, D-Conn., would result in U.S. credits worth $9-$23/ton in 2010, the National Commission on Energy Policy estimated. The bill received 43 votes in favor the last time the Senate voted on it.
Not only are speculators trying to figure out if now is a good time to buy, but companies that will be subject to restrictions are assessing whether early credits may be a bargain compared with the costs of physically reducing emissions in the next decade.
In August a group of seven Northeast states, which previously committed to limit CO2 emissions from power plants starting in 2009, agreed on the basic rules for their regional carbon market. Under a standard "cap and trade" program, owners of plants that reduce emissions beyond what is required will be able to sell the additional reduction to companies that aren't cutting their emissions enough.
To some extent, Northeast states will give credit for voluntary reductions and offset projects from December 2005 onward. The rules are complex though, and each state still must adopt them. The Regional Greenhouse Gas Initiative is comprised of Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont. Maryland has agreed to join. Massachusetts and Rhode Island may do so, too.
California is a few years behind the Northeast in defining its rules. But the Golden State's new law covers its entire economy, not just power plants, and it will limit all six greenhouse gases, not just CO2. The state has promised fair treatment for early reductions and verified offsets. Although that's vague, the market seems to guess that little credit will be given for reductions before 2003.
"Certainly anything after the legislation passed I think will be credited, and I anticipate that the early actions for the past few years will get credited," said Jim Marston, an attorney with Environmental Defense, who leads many of that organization's efforts on global warming at the state level.
California's law further promises that the state will work to get its credits recognized in any national trading system in the event of federal greenhouse gas limits, and in the international market.
To have any chance of being recognized, credits must be well documented. Independent specialists verify that offset projects accomplish what the owners say. Companies, city governments and others that reduce emissions record their efforts at registries run by the U.S. Department of Energy, the California Climate Action Registry, and the Chicago Climate Exchange, which runs a carbon futures market for voluntary reductions.
The political fight over which credits get recognized could be brutal. According to the Natural Resources Defense Council's Bryk, the Northeast and California won't accept the Chicago Climate Exchange's carbon futures as early-action credits. Some projects involved in the exchange might qualify, but being credited by the exchange won't count for anything, she said. Bryk wasn't denigrating the voluntary efforts of companies, but the exchange just has too many loopholes, she said, to warrant government support as the U.S. moves into mandatory emission reductions.
The spokesman for the Chicago Climate Exchange didn't respond to questions on the matter.