Carbon is the next gold

Consultants and financiers scramble to stake their claim in the trillion-dollar carbon market

By Victoria Schlesinger

Illustration by Christian Northeast

Those making the loudest arguments are businesses that will most likely be regulated—and therefore required to pay for polluting—under climate-change legislation. They are pushing for cap-and-trade rules that best serve their interests, fighting over how low the cap should go, whether it could be broken under certain circumstances, and how carbon allowances should be handed out—for free, by auction, or both. What emitters want differs from what environmentalists want, and financiers and politicians have different ambitions altogether. “It’s contentious,” said Antonia Herzog, a climate legislation advocate for the Natural Resources Defense Council, about the carbon market design. “This is where the money is, so basically it’s a food fight right now.”

At Carbon Forum America for instance, where most attendees were from the financial sector, the wants of industry didn’t seem to be of central concern. David Struhs, vice president of environmental affairs for International Paper, the world’s largest paper products company, found that out when he registered for the conference. In his presentation, Struhs told the crowd, “The nice lady at the counter … went through ‘Are you a technology provider, a consultant, a lawyer, a project developer, a trader, financial services, government employee …’ and that’s when I broke in and said, ‘industry.’ And she said, ‘Oh, we don’t have that one. I’ll just put you down as ‘other.’” Struhs paused. “Ladies and gentlemen, I think this is symptomatic of one of our problems.”

Emitters may have been an afterthought at the conference, but they wield significant influence with members of Congress, who will design climate change policy. International Paper, like most large emitters, is arguing for the government to distribute carbon allowances free of cost to those with a history of emissions. Under this scheme, because International Paper emitted 10.5 million Mt last year, the company would likely be given 10.5 million allowances. Additionally, industry would like the cap—which will decrease over time to shrink the country’s total emissions—to lower as slowly as possible. “From the perspective of what’s actually doable, you would hope that the reduction curve would start relatively shallow and grow deeper over time,” said Doug Stilwell, International Paper’s manager of environmental health and safety. “Because we don’t have a ready answer. We all know of ways we can save a little [emissions], but nobody knows how we can save a lot.”

Many environmental groups oppose handing out allowances for free and instead advocate auctioning them off in a cap-and-trade system. In this scenario, companies would buy carbon allowances up front from the government, bidding against one another for whatever price the market will bear. Environmentalists argue that an auction will help discover the price of carbon, prevent companies from lobbying politicians for extra allowances, and ensure a system that benefits the public. The funds generated from an auction, they say, should help taxpayers. MIT economist John Reilly has explored a system modeled after Alaska’s distribution of oil revenues to state residents; he found that equally dividing carbon allowance rebates could distribute $1,600 to $4,900 annually per family of four.

International Paper opposes an allowance auction for the same reasons as most emitters. “A tremendous amount of capital will be sapped out of the emitters to purchase the right to do what they have historically done,” Stilwell said. “Which would you rather we do—spend the money to reduce the emissions or buy the right to continue to emit?” Stilwell conceded it was not an either-or situation, though he also said that companies would move offshore if compliance became too costly.

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Damn straight - James Cameron rocks!

Is it supposed tobe COOL to buy the right to pollute? I'm new here, but have heard of this idea before and always assumed it was some sort of a joke, like the ancient idea of buying indulgences so one could sin. Does this actually make sense to anyone besides maybe someone like the former managers of a company called Enron which brought rolling black outs to California?

@Siver Bear - dude you spent too much time as an altar boy as a grom. By creating a market for co2 emissions, coupled with legally binding targets, countries and companies have start paying the true price for their activities. As a result investment, at scale, will be channeled to reduce GHG emissions and generate cleaner energy. Companies that adapt will still make a profit and only now in conjunctiuon with the environment. Wealth can still be created, only now it's wealth worth having.

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