In two months' time, a committee of 14 scientists, bankers, environmentalists and regulators is slated to deliver a report that will set the tone for future rules on greenhouse gas emissions in the U.S. The Market Advisory Committee (MAC) was called into being last September, when California Gov. Arnold Schwarzenegger signed into law a bill that commits the state to cut greenhouse gas emissions to 1990 levels by 2020–the first law of its kind in the U.S. As required by the new law, California's environmental officials assembled the panel to work out how the state could deliver on its new obligations, which are expected to amount to roughly a 25% cut in emissions.
The committee is unelected. It has no regulatory authority of its own. But these 12 men and two women find themselves in a position of influence at what could come to be seen as an historic turning point in the planet's struggle to reverse the course of global warming.
What that panel tells the state when it delivers its report on June 30 should define the regulatory framework that California adopts–and, as the first framework of its kind in the U.S., its influence could reach all the way to Washington, says Winston Hickox, the MAC's chair. "It's a tight time frame, but we can do it. And if the quality of the work is sufficient, there's a chance that it could end up benefiting deliberations in Congress about how to construct a national program."
All solutions have to do one simple-sounding thing: cut the amount of carbon dioxide released into the atmosphere. But designing regulations to do that requires a tricky balancing act: The cost of emitting carbon has to be high enough to make investment in new technology worthwhile–but not so high that it cripples whole industries. The market-driven approach used in most existing carbon regulations starts with a political and environmental decision about exactly how much of a cut in emissions is required, over what period. The next step is to identify companies that will do the actual cutting and then hand out emissions allowances, measured in millions of tons. If a company can reduce emissions below its permitted level, it has credits which can be sold to a company that has not been able to meet its target, thereby creating a de facto market for CO2 and giving companies a financial incentive to cut their emissions.
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That theory can already be seen in practice in the European Union's Emissions Trading System (EU ETS), where daily volumes of around a million tons of CO2 have been routinely traded during the first phase of the scheme, which ends this year. David Hone, the London-based group climate change adviser for oil giant Royal Dutch/Shell, says that the European market has been a big success: "It started off from nothing two years ago. It's liquid, it trades at high volume, it responds to information. It exhibits all the features that a good market should do."
Not everyone has been so complimentary. After hitting a peak price of around 30 euros per ton in April 2006, the carbon price dropped dramatically as it became clear that EU governments had handed out such generous allowances that there was little need for many polluters to buy credits. Today, CO2 prices hover just above one euro and environmentalists have angrily accused the project of being a "greenwash."
Partly in response to this criticism, the EU is now setting tougher goals for the second phase, which gets underway at the start of 2008. The ETS futures market forecasts a sharp increase in carbon prices to around 18 euros. Shell's Hone says that the expectation of higher emissions costs is already prompting the company's businesses to take action to cut their emissions–but he also defends the first phase of the ETS: "The one thing that could have killed the system off completely would have been massively high prices, so I think governments erred on the side of caution."
In the U.K., where politicians are currently considering a bill that would legally oblige the country to cut its emissions by 60% before 2050, more work has been done to find out exactly what kind of changes will be required. To hit that target, says Hone, the U.K. would need to construct around 60 large offshore wind farms, while renewing existing nuclear power stations and adding new ones. In addition, all of the country's coal-fired power stations and two-thirds of its gas-fired stations would need to be using as-yet-immature carbon sequestration technology. "We'll have to do all of these things. If you start taking some of these options off the table–for example, nuclear power–then you put even more pressure on technologies like carbon capture," he says.
To produce action on this scale, the cost of emitting carbon has to be high. As a result, a handful of countries have avoided the market-driven caprice of an emissions trading system and instead adopted a carbon tax, slapping a direct cost on emissions in the hope of producing a more urgent response from industry.
Norway implemented its tax in 1991 and can claim a certain amount of success. Prompted by the tax, which amounts to around $45 per ton of CO2 emissions, Norwegian oil company Statoil spent around $90 million in 1997 setting up the world's first environmentally motivated carbon sequestration facility at its West Sleipner oil rig, situated in the North Sea. Olav K??rstad, CO2 project leader for Statoil, says that the company has been injecting about one million tons of carbon annually into a vast reserve one thousand meters beneath the rig: "If we'd had to pay $45 for each ton, we'd have been looking at an annual tax bill for Sleipner alone of $45 million. Compare that to the capital expenditure of $90 million and we've made quite a saving."
The U.S. has been the laggard among developed nations–although now there is clear momentum for action by Congress with as many as seven different bills up for consideration. Whatever happens in California or in Congress, you can bet on three things: First, the U.S. will still be years behind the Europeans; second, the solution will almost inevitably be a market-based one; and third, the radical change that any regulation needs to achieve is unprecedented. "We are really trying to design the economic infrastructure that will drive CO2 emissions out of the world's energy systems by 2100," says Kevin Leahy, managing director for climate policy with Duke Energy Corp. "This is an enormous, yet still delicate, task, but it shouldn't be seen as impossible."
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