Ken Silverstein EnergyBiz Insider Editor-in-Chief

The U.S. government has been reluctant to pass mandatory standards to curb carbon emissions. And so some states are taking the lead. Meantime, many companies are taking proactive positions not just because they anticipate greater restrictions but also because it makes good business sense. Indeed, the pressure to address global warming has forced the public and private sectors to come up with solutions -- not just feel good ideas but ones that cut emissions using the latest technologies and market-based strategies.

Seven Northeast states are leading the charge here in the United States. Under the so-called Regional Greenhouse Gas Initiative, they will implement a cap-and-trade program to lower carbon dioxide (CO2) emissions -- the first mandatory cap-and-trade program for CO2 emissions in U.S. history. New York is in the forefront and is followed by Connecticut, Delaware, Maine, New Hampshire, New Jersey and Vermont.

The cap-and-trade system allows companies that exceed expectations to sell credits to those that are unable to meet set targets. Actual emissions fall because the ceiling is progressively lowered. Beginning in 2009, emissions of CO2 from power plants in the region would be capped at current levels -- approximately 121 million tons annually -- until 2015. The states would then begin reducing emissions incrementally over a four-year period to achieve a 10 percent reduction by 2019.

"We believe that the agreement reached to cap CO2 emissions from electric generating plants in the Northeast is a creative model to address this global problem," says Robert Catell, chairman and CEO of KeySpan

Greenhouse gases rose in the United States by 2 percent in 2004, according to the U.S. Energy Information Administration. Along with CO2, methane and nitrous oxide climbed to 7.12 million metric tons, up from 6.98 million metric tons in 2003. That's 16 percent greater than in 1990, or about 1.1 percent average annual increases. Most of the increase comes from CO2 and specifically burning such fossil fuels as coal, natural gas and oil.

Market-based Initiatives

An understanding exists that the growth rates of CO2 emissions must be cut. But the dispute is over the best tack to do so. Canada, Europe and Japan are all signatories to the Kyoto Protocol that requires developing countries to cut their emissions by 5 percent from their 1990 levels.

President Bush rejected that treaty in 2001. Instead, his administration would tie emissions targets to economic incentives. He says that proposal is more realistic because industries would have the financial incentive to voluntarily reduce their own emissions. At the same time, the president says that his plan would save companies about $1 billion in costs associated with the requirements of the global warming pact.

A lot of companies are taking part in market-based initiatives to cut carbon emissions. Several utilities, for example, helped design the Chicago Climate Exchange while a handful of power companies are participating in the Environmental Protection Agency's Climate Leaders program. They include American Electric Power and Cinergy Corp., which has pledged to reduce greenhouse gas emissions by five percent before 2010. Meantime, FPL Group has promised to curb such pollutants by 18 percent before 2008 and PSEG has also said it will cut such gases by 18 percent by 2012.

Newark-based PSEG is supportive of tougher, uniform national regulations. It has therefore endorsed a federal measure to make CO2 reductions mandatory. It says that the EPA consortium is "for real" and is a "win-win" proposition that cleans the environment while improving the efficiency of the company's generation fleets.

"There is growing evidence that we should be concerned about global warming," says Ron Drewnowski, director of environmental strategy for PSEG. "We are a company that says the time to act is sooner rather than later." The administration's voluntary approach is a "good step forward," he adds, but a more assertive tack is coming.

Cinergy is another leader. About 95 percent of the electricity that it produces is derived from coal. In September 2003, Cinergy committed to spend $21 million between 2004 and 2010 on projects to voluntarily reduce or offset its greenhouse gas emissions. The goal is to cut such emissions by 5 percent by 2010. In practical terms, the company has converted some older coal-fired plants to natural gas peaking facilities.

Cinergy and AEP are working with General Electric and Bechtel Corp. to design and construct separate coal gasification 600 megawatt plants in Indiana and Ohio, respectively. Such plants, which are in the developmental stages, seek to cleanse coal of its impurities before the eventual byproduct is released. AEP CEO Michael Morris says that his company needs more generation and coal gasification offers environmental solutions at cost effective prices.

Neither AEP nor Cinergy, however, favor mandatory regulations. They say that would have a disproportionate effect on those companies that rely on coal and which are located principally in the Midwest and South. "Voluntary steps move us down the road," Rogers says, adding that the 5 percent carbon dioxide reductions to which Cinergy has committed is a formidable goal. "I do think there will be a son or daughter of Kyoto that makes sense."

Environmental Stance

The administration is in tune with the voluntary position. The president says the international treaty would impose mandatory cuts on the American workforce, costing the American economy $400 billion and 4.9 million jobs over the next several years. While not as aggressive as the Kyoto Protocol, the president says that his plan provides more realistic incentives for U.S. companies to reduce emissions, seeks alternative forms of energy, increases conservation efforts, and invests in clean-generation technologies.

President Bush endorses a cap-and-trade program, too. And companies have embraced them, forcing them to come up with creative solutions to cut emissions -- ideas that have saved money. Exchange programs, in fact, have been proven effective.

While far from a harmonious relationship, utilities and environmentalists have agreed that global warming is a problem that must be addressed. And a cap-and-trade program may be a good place to start. Kevin Burke, CEO of Con Edison, says he supports the initiative in the Northeast to bring down greenhouse gas emissions, calling it "an important first step ... consistent with our commitment to environmental excellence."

"The market-based cap-and-trade system supported by businesses and environmental groups alike will unleash cleaner, more efficient energy technologies and benefit the economy of the entire Northeast region," adds Frances Beinecke, executive director of the Natural Resources Defense Council. "This precedent-setting initiative will set the model which other states and the rest of the country will be sure to follow." His position is supported by Environmental Defense and the Nature Conservancy.

Global warming is a threat to the environment. The gradual realization of this coupled with the availability of new technologies mean that the public and private sectors can take more proactive steps to address the issue.

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