Bringing carbon buyers and sellers to market

January 03, 2007
This editorial by Professor David Sunding appeared Dec. 28, 2006, in the San Francisco Chronicle.

Gov. Arnold Schwarzenegger's executive order to begin implementation of a market-based compliance program encouraging businesses to reduce greenhouse-gas emissions is clearly a step in the right direction toward cleaning our air of harmful carbon particulates. The next step is to make it financially attractive enough for businesses to comply with the program.

Ask any inventor: Thinking up a workable idea is one thing. Marketing it in a meaningful way is another. It's the difference between, say, having the blueprints for the internal combustion engine and an assembly line ready to roll out a fleet of Model Ts.

The carbon market is in a similar situation. We know that sustainable forestry can help lower atmospheric carbon levels, a stated goal for those concerned with global climate change. Well-managed forests flush with rapidly growing trees remove (or "sequester") carbon quite efficiently. But we don't know yet whether markets can be established in this country to provide any economic incentive to do so. In Europe, carbon trading has been practiced since January 2005.

Trading carbon credits might work to reduce greenhouse-gas emissions in an economically viable way. If a company wants to build a new power plant that would result in X amount of carbon emissions, for example, it could offset those emissions by buying credits from another company with the means of sequestering the same amount of carbon in trees or other sources. Components of the Kyoto agreement, the first multinational attempt to limit carbon emissions, established protocols for companies in ratifying nations to openly trade carbon credits. And while the agreement has proved controversial in the United States and elsewhere, interest in developing domestic carbon markets is gaining momentum.

Why the challenge? Complexity is the main culprit. Markets require established definitions, baselines and enforcement mechanisms -- features missing from the relatively new practice of commercial carbon sequestration. Much of the accepted science in the field comes with margins for error as high as 40 percent. Truth is, carbon sequestration is difficult to measure. The amount of carbon being sequestered is not obvious, nor is the length of time the carbon is being sequestered. Exactly what level of credit to grant for various activities isn't obvious, either. One school of thought says that credit should be given for actions that decrease net carbon emissions. But what about companies that already sequester carbon efficiently? They would receive no reward for their actions under such guidelines. The same is true for energy producers using comparatively "clean" technologies.

No company that helps reduce net carbon emissions should be ignored. California companies that practice sustainable forestry, for example, sequester tremendous amounts of carbon -- and do so very efficiently -- by optimizing tree-growing conditions on their lands. Unless these companies are "grandfathered" into any market agreements, they would forgo any benefit for what are extremely positive actions. If you are already sequestering carbon efficiently, your potential to provide a significant difference over "business as usual" is very slim.

These challenges, however, shouldn't prove insurmountable. Markets, once established, ultimately bring efficient solutions, and are preferable to more government regulation and mandates, which will likely increase costs.

California may have sufficient economic clout to be a leader in establishing domestic carbon markets. While high real-estate values and costs of doing business may put California companies at a disadvantage, there are advantages to taking a leadership role and encouraging markets to develop sooner rather than later. Once markets are established, the expertise companies develop becomes marketable, transferable knowledge. If the cost of sequestering carbon in forests or through other means provides a financial incentive to other methods of reducing net emissions, carbon markets could flourish. It's too soon to tell for sure, but forestry and other land-based sequestration possibilities look promising.

David Sunding is a professor of environmental and resource economics in the College of Natural Resources at UC Berkeley and served as a senior economist at the White House Council of Economic Advisors during the Clinton administration.