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U.S.: Exchange Seeks Role In Emissions-Trading Business In Absence Of Kyoto

The Kyoto Protocol enters into force tomorrow without the United States -- the world's biggest emitter of carbon dioxide and other so-called "greenhouse gases." But despite Washington's objections to the treaty, other U.S. actors are taking steps in line with Kyoto. Northeastern U.S. states are planning carbon emission controls and, for the past 14 months, an entity known as the Chicago Climate Exchange has been encouraging emitters to join its "cap and trade" approach, with some success. RFE/RL interviewed the chairman of the exchange, Richard Sandor, who cited a growing interest by U.S. companies to remain compatible with the emission-trading system emerging from Kyoto.

New York, 15 February 2005 (RFE/RL) -- A key feature of the international treaty on climate change is the emissions trading system used by European Union states.

The market-oriented system was included in the treaty at U.S. insistence and over EU objections. Now with Washington's rejection of Kyoto, the United States appears to be on the sidelines as Europe implements its emissions-trading strategy.

But a small segment of U.S. industry has committed to a similar system through a private trading exchange based in Chicago. Large global firms such as Ford, Motorola, and DuPont are among the 82 members of the Chicago Climate Exchange.

The chairman of the exchange, Richard Sandor, tells RFE/RL in an interview that members are motivated, in part, by the need to remain competitive globally.

"Many of our members have joined as well because they knew they were going to live in a carbon-constrained environment outside of the United States and they wanted to get a first mover business advantage by learning how to account. I mean some of these, you know, are not trivial questions for a Ford Motor Company to take a look at its 39 plants in North America, to measure what it did in Mexico and Canada, to figure out what forms to use, to learn the conversion ratios between fossil fuels and carbon emissions," Sandor say.

Under the compulsory plan adopted by EU members of the treaty, about 12,000 industrial facilities will be granted a limited number of emissions permits. Companies that produce less pollution than they are legally permitted can sell surplus credits to companies that exceed their limits. The aim is to use market forces to reach an environmental goal -- the lowering of emissions.

The Chicago-based system, though far smaller than Europe's, operates in a similar way. The exchange's members have voluntarily committed to reduce their emissions in of greenhouse gases in 2006 by 4 percent below the average of their baseline levels of 1998 to 2001. Sandor says members to date are far ahead of that goal.

Members have come to believe, he says, that the market-based approach can improve efficiencies, spur investment in emissions-reduction equipment, and boost technological innovation.

"It's very important to recognize that before you can reduce carbon emissions, you have to measure them, and the act of measuring them identifies sources where you may be using or paying too much for power, where you can substitute renewables for your standard energy, where you're not monitoring the day-to-day fuel costs, you're not considering that," Sandor says.

Though voluntary, the Chicago members agree to be monitored by the National Association of Securities Dealers (NASD), the main private-sector regulator of the U.S. securities industry. The NASD audits the members' annual emissions and monitors trading activity on the exchange to guard against fraud and manipulation.

Exchange members are finding they are gaining important logistical experience in everything from filling out forms to developing internal engineering and measuring energy use, says Sandor.

"Most of the skeptics said you'll never get an American company without the force of law to enter into a legally binding commitment to reduce their carbon emissions. Well, we not only have found that myth easily dispelled, we've also found that you can monitor, that you can verify and all the people said that could never be done," Sandor says.

The exchange is modeled after a successful U.S. effort to limit sulfur-dioxide emissions. The 1990 amendments to the Clean Air Act, supported by the administration of President George Bush, set a cap on those emissions, which were linked to acid rain, and distributed tradable emissions permits.

The program is widely seen as a success, with sulfur-dioxide emissions sharply down and costs borne by industry far lower than many estimated. Those trading markets involved a far smaller range of emissions than called for under Kyoto. But Sandor, who helped design the U.S. exchange for sulfur dioxide, sees many parallels with the current U.S. debate over carbon-emissions trading.

"There was a notion that [the sulfur-dioxide cap] would never be enforced and that American companies wouldn't reduce it. As a matter of fact, it was 18 million tons a year being pumped into the atmosphere from coal-fire facilities in the [1980s] which was the baseline and this year it's 9 million. So we've reduced sulfur emissions by 50 percent, [with] virtually little if any cost to the economy, great net social benefits and when's the last time you heard about acid rain in America?" Sandor says.

The Chicago exchange also owns the European Climate Exchange, which is to facilitate Kyoto Protocol-related transactions for EU states. Expertise gained in that vastly larger market can only help its Chicago counterpart, says Sandor.

"What we're seeing in our own small way at the Chicago Climate Exchange is a building credibility that markets are the best way to deal with our scarce and precious resources such as air and water. We get a lot of gratification because the left wing thought we were a bunch of capitalists and the right wing thought we were a bunch of environmentalists and I thought that was a pretty good place to be," Sandor says.

The Chicago exchange was set up with a $400,000 grant from the private Joyce Foundation. Sandor says the exchange has just raised $25 million, has full funding to go forward, and is looking into extending to a second phase from 2006 to 2010.