Emission-Credit Trading Rises,
Anticipating Kyoto Protocol

WASHINGTON -- Global trading in credits for greenhouse-gas emissions has surged this year as companies and governments anticipate ratification of the Kyoto Protocol to combat global warming, which appears likely early next year.

According to a new study by the World Bank and Natsource LLC, a New York-based trading firm, trading volume is likely to quadruple this year over 2001. Jack Cogen, the firm's president, said the increase comes from companies looking forward to national and regional regulatory programs that will restrict their output of carbon dioxide and other so-called greenhouse gases that are believed to be raising the temperature of the planet.

"If you're a company and you're looking toward the future, you may see a large liability looming," said Mr. Cogen, who noted that regulatory systems to limit emissions already have begun in the United Kingdom and Denmark and that the European Union will start one in 2005.

All of the regulatory programs are based on the so-called cap-and-trade model, which was first developed in the U.S. in the early 1990s to reduce emissions of sulfur dioxide, which causes acid rain. The regulator gives each company a cap, or an annual quota on the amount of pollutant it can emit. A company that exceeds the quota must offset its emissions by buying equivalent credits -- or rights to pollute -- from companies that reduce their emissions below their cap, and thus have excess credits to sell.

The European trading systems and one being prepared in Canada -- which hasn't yet ratified the Kyoto treaty -- trade in contracts based on emissions of carbon dioxide. According to the World Bank study, trades involving 12 million metric tons of carbon were transacted in 2001. This year, the World Bank projects trades involving 67 million metric tons. The Paris-based International Energy Agency estimates that world-wide energy-related emissions of carbon dioxide totaled 21 billion metric tons in 2000. One metric ton is equal to 2,204.6 pounds.

Among the new traders are companies and governments that have contributed $185 million to the Prototype Carbon Fund, which is run by the World Bank to test trading mechanisms and to provide credits to companies that sell technologies that reduce carbon emissions to customers in developing countries. An official of the World Bank estimates that since 1996, when carbon-dioxide-emissions trading began, there have been somewhere between $350 million and $500 million in trades, although trading data are incomplete.

According to the bank and to Natsource, some U.S. companies with global operations are involved in the trading, but the major surge has come from Europe, where 5,000 companies face emissions controls from the EU system, a regulatory program that is expected to start in three years. Many of the current trades, according to Mr. Cogen, are designated for future periods by companies hoping to hedge against an increase in the market-based price of emissions credits.

Jonathan C. Pershing, a climate-change analyst for the International Energy Agency, said that European nations are relying heavily on emissions trading as a way to reach their target under the Kyoto Protocol, which requires them to lower their emissions by 8% below 1990 levels by 2012.

At a videoconference briefing in Washington, Mr. Pershing said a new IEA study shows that European emissions have been largely flat since 1990, while U.S. emissions have continued to grow. China, whose carbon-dioxide emissions soared from 1990 to 1996, has managed to hold them flat since then.

"That's impressive," Mr. Pershing said about China, "when you consider that their gross domestic product has continued to grow." Neither the U.S., the world's largest carbon-dioxide emitter, nor China, which ranks second in total carbon-dioxide emissions, will be subject to the Kyoto Protocol when it is fully ratified. The Bush administration has chosen not to ratify the treaty and China, as a developing country, isn't subject to it. Ratification by Russia is expected to complete the process early next year.

Write to John J. Fialka at john.fialka@wsj.com¹

Updated October 18, 2002 12:18 a.m. EDT