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Jack Cogen, president of Natsource, couldn't be happier about this trend. Besides trading in energy and emissions credits, Natsource consults with firms that are weighing the idea of operating cleaner. Greenhouse-gas trading and consulting provide only 10% of Natsource's revenue, but the company expects that share to rise to 50% by 2007. "It's a fascinating business opportunity. Can you use market forces to effect environmental and societal goals?" asks Cogen, 46. "Can you put a cost on what was a free resource?"
Cogen thinks you can, and he's not alone. In 1990 the Clean Air Act capped emissions of sulfur dioxide, a major contributor to acid rain, and ordered that they be gradually reduced. The government issued "allowances" to companies and let them trade polluting rights on the open market. A power company that cut its emissions at relatively low cost could sell its leftover emission rights to another utility facing higher costs for pollution control.
Robert Stavins, an economist at Harvard's Kennedy School of Government, estimates that this cap-and-trade system, vs. a system of rigid caps on each firm's emissions, saves U.S. companies about $1 billion a year in compliance expenses. "It's the most cost-effective way to reduce emissions," he says, "and companies have an incentive to cut pollution so they can sell credits." The Environmental Protection Agency estimates that sulfur dioxide emissions have been halved since 1990 and that Americans save $50 billion a year in health and environmental costs associated with acid rain.
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."