Selling Smoke

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Expecting that international support for Kyoto will grow despite U.S. government opposition, companies around the world including U.S.-based multinationals want to be prepared. Cogen says today's nascent trading of CO2 credits forces executives to "sit in a room and figure out how to manage, market, verify and account for their emissions. We call it learning by doing."

Some U.S. companies are not just experimenting; they are buying carbon dioxide credits today, at relatively low prices, as insurance against future regulations. World wholesale prices of carbon dioxide credits have jumped more than 600% since 1996, but prices differ from country to country. Kyoto allows credit trading only among signatory countries, and when it became clear in 2001 that the U.S. would not adopt Kyoto in the first round, the price of U.S. credits fell.

Michael Intrator, a managing director at Natsource, believes that the U.S. should have led the way. "America had a massive information advantage," he says. "We understood how cap-and-trade worked because we traded sulfur dioxide. Now we are left in a sea of uncertainty because we didn't ratify Kyoto. The overarching belief is that sometime we will. But by then, we might be at a competitive disadvantage."

Melissa Carey, a climate-change analyst at the Environmental Defense Fund, says that despite all the greenhouse-gas trading under way, it won't reduce emissions until Kyoto takes effect. "Sulfur dioxide was successful," she says, "because there are huge penalties for failing to comply." One Kyoto provision lets industrialized countries fund carbon-reduction projects in developing countries that do not have emission caps. For example, a U.S. utility may find that cutting its emissions is more expensive than planting a carbon-trapping forest in Bolivia. But until Kyoto is ratified, there won't be any independent verification that the forest has been planted.

Another obstacle to wider trading of emissions is nature. Forests burn down. Hurricanes wash away fields. Then there are governments that ignore international agreements and change environmental policies in ways that can radically affect the value of existing emissions credits. Until financial instruments are developed to ensure credits against the ravages of politics and nature, trading greenhouse gases will be a risky business. But the traders at Natsource are betting that multinational firms are also learning about the risks of doing nothing in the face of regulations that they know are coming, sooner or later.