Changing Climate: New Market Shows Industry Moving On Global Warming --- Even as Bush Opposes Kyoto, Firms Are Trading Rights To Emit Greenhouse Gases --- DuPont Tries to Get Out Front
By Jeffrey Ball

01/16/2003
The Wall Street Journal
A1
(Copyright (c) 2003, Dow Jones & Company, Inc.)

MISSISSAUGA, Ontario -- DuPont Co. has spent heavily for a decade cutting its emissions of carbon dioxide and other "greenhouse gases" believed to be warming the Earth. Now, from a windowless office in this Toronto suburb, a DuPont staffer named Rob Routliffe is embarked on a futuristic venture to make some of that money back.

Mr. Routliffe spends his days trying to peddle an esoteric new product DuPont thinks will someday become hot. It's a piece of paper representing a ton of carbon dioxide that theoretically would have been released into the air, but that, thanks to DuPont's environmental efforts, wasn't. In essence, he is selling permits to contribute to global warming.

The concept results from the Kyoto Protocol, which requires signatory nations to cut their greenhouse-gas emissions by a set amount. Those countries divvy up the burden among their industries, and ultimately among individual large companies. To make the caps more feasible, some countries are setting up trading schemes, which permit companies that can't cut enough emissions on their own to buy compensating credits from others that cut more than their share.

The Bush administration has rejected the Kyoto treaty. But the rise of U.S. greenhouse-gas trading shows how many large corporations are moving ahead on their own to deal with global warming.

One reason is that U.S. multinationals know their factories in countries that signed Kyoto will have to meet local limits. Another is that many of the companies figure that despite the Bush administration's stance, it's only a matter of time before they'll be required to cut their greenhouse-gas emissions on their home turf. In the meantime, they seek to present a good-citizen face to the public, and to persuade Washington that whatever greenhouse-gas-reduction policy it ultimately settles on should include credits that industry can trade to lower its cost of compliance.

In the latest sign of U.S. corporate interest, DuPont and several other multinationals are expected to announce today something called the Chicago Climate Exchange. Participants will promise to cut their greenhouse-gas emissions by a common percentage. Doing so will generate a currency of emissions credits that the participants hope will become internationally tradable.

Another initiative is due in a few weeks from the Business Roundtable, representing about 150 mostly U.S. companies. It plans to announce that each member has agreed to measure its annual greenhouse-gas emissions, publicly report the total and pledge to cut it by a certain amount.

The Roundtable, like the Chicago group, hopes such cuts will eventually produce emission credits that are globally tradable. Shorter term, some members hope such a show of concern about global warming will quiet calls for U.S. caps on emissions. The Bush administration has sketched out a voluntary plan to slow the rate of increase in greenhouse-gas emissions. But at a Senate hearing last week, Republican John McCain and Democrat Joseph Lieberman called for a U.S. system of caps and trading.

The greenhouse-gas market envisioned by the Kyoto treaty actually is based on a model created in the U.S.: a "cap and trade" system started in the early 1990s for sulfur dioxide, which causes acid rain. But the idea of a global greenhouse-gas market is far more complicated. Today that market is still young, wild and inconsistent.

There's no central exchange, so people such as Mr. Routliffe have to seek out buyers one at a time. An unanswered question in many markets is how to police the deals; so far, companies have been hiring outside firms called "verifiers." The market isn't global yet, but a patchwork of fledgling local markets yet to be tied together. Only two, Britain's and Denmark's, are government-regulated, though the European Union plans to launch a market in 2005.

But trading is ramping up quickly. The World Bank says volume could double this year, to nearly $400 million. It estimates that since the first trade in 1996, permits for about 200 million metric tons of "CO2 equivalent" -- the market's currency -- have changed hands. Experts say this has involved several hundred transactions, the bulk of them in the last year in the U.K., which unveiled its market in April.

No U.S. company has been more aggressive in greenhouse-gas trading than DuPont, and its experience offers a guide to challenges the rest of U.S. industry is likely to face as it seeks to master the emerging market.

DuPont's involvement has its roots in problems the company had with a different sort of emission: chlorofluorocarbons, or CFCs. In the late 1980s, many scientists concluded that these widely used refrigerants and aerosols were eroding the Earth's protective ozone layer.

DuPont at first questioned the science. Its resistance sparked protests from environmental groups, which demanded a CFC phaseout. DuPont ultimately accepted the concerns and developed, along with other chemical companies, a CFC alternative: hydrofluorocarbons, or HFCs. The company then threw its support behind a treaty to phase out CFCs, called the Montreal Protocol, which the U.S. ratified.

"We operated defensively and reactively as the issue gained in public opinion and moved away from us," says David Findlay, who oversees greenhouse-gas trading as an executive at DuPont's Canadian operation. Stung by the CFC experience, executives sat down in the early 1990s to figure out what other environmental issues they might confront.

High on the list was global warming from certain gases thought to trap the Earth's heat in an atmospheric greenhouse effect. DuPont counted up its world-wide greenhouse-gas emissions and concluded that in 1990, they came to 86 million tons of CO2 equivalent -- more than all of Austria had. Only about 20% actually was CO2, from such processes as burning natural gas to produce power. Another nearly 20% came, perversely, from HFCs, the ozone alternative.

The biggest chunk, 60%, came from a gas far nastier than CO2 in global-warming terms: nitrous oxide, or N2O, commonly called laughing gas. DuPont makes it in five factories around the world for use as an ingredient in adipic acid, which goes into nylon. Experts say a ton of N2O has as much global-warming effect as 310 tons of CO2.

In 1995, DuPont announced that, by 2000, it would voluntarily slash its greenhouse-gas emissions 40% from the 1990 level. It also said it would hold its global energy use flat through 2000, despite its expansion plans.

The pledges meant costly changes in the way its factories were run. In HFC plants, whose actual product is known as HFC 22, DuPont traditionally vented into the air a greenhouse-gas byproduct called HFC 23. Now it captures HFC 23, pressurizes it into a liquid, and hauls it to incinerators. Although the incineration releases some CO2, this has far less effect on the atmosphere than vented HFC 23, company officials say.

To cut nitrous-oxide emissions, DuPont spent $10 million to $20 million at each adipic-acid factory, adding machinery that breaks the gas into harmless nitrogen and oxygen before releasing it into the air. The machinery contains catalysts that have to be changed at least yearly, at more than $1 million a pop. The costs frustrate company managers who have budgets to meet. There was "much gnashing of teeth" at the most recent round of nitrous-oxide-catalyst changes, Mr. Routliffe says.

DuPont got into greenhouse-gas trading to try to recover at least a small part of these costs. One of its adipic-acid plants, in Maitland, Ontario, had taken part in a Canadian pilot program in the late 1990s to trade credits for reducing such gases. The manager of DuPont's adipic-acid business in Canada, sensing that such trading would surge after the Kyoto Protocol was negotiated in 1997, urged top executives at headquarters in Wilmington, Del., to start a trading operation. They housed it at DuPont's Canadian base in the Toronto suburb of Mississauga.

DuPont brought Mr. Routliffe aboard in 1999 to help set it up. He was a lawyer by training -- a useful background for a job that would entail lobbying governments to take DuPont's interests into account as they set up greenhouse-gas programs.

An early test he and Mr. Findlay faced involved Britain, which in 2001 was developing a cap-and-trade arrangement. Initially, the government proposed a tax, called a "climate levy," on companies' energy use. Then, amid industry protest that the tax was too onerous, the government agreed that a company could get out of paying 80% of the tax by committing to a cap on its energy use. If it ended up cutting its energy use below that cap, it could sell the resulting credits to a company that came up short.

The British government also planned a reverse auction. It put up a pot of money and invited companies to sell it pledges to reduce their greenhouse-gas emissions by a specified number of tons. By making those pledges, the companies in effect were agreeing to greenhouse-gas emissions caps.

In exchange for their share of the government money, they got official "allowances" to emit as many tons as their caps allowed. Again, companies that didn't use all their allowances could sell them to companies that needed more.

How this setup would affect DuPont depended on the details. One detail was whether the system would allow trading of nitrous oxide -- important to DuPont, because it has an adipic-acid plant in the British town of Wilton. Initially, Britain proposed capping emissions of several gases, including nitrous oxide, but allowing only one gas, carbon dioxide, to be traded. In the end, after trips to London by Mr. Routliffe to press DuPont's case -- part of a wider lobbying effort by business -- the U.K. included several gases, including nitrous oxide, in its trading.

Another issue was how the U.K. would compute a company's baseline, the level of emissions from which it had to cut. DuPont wanted the British to use an average of five years of emissions, 1996-2000. It had been investing for several years in efforts to reduce nitrous-oxide emissions from its Wilton plant and wanted credit, Mr. Routliffe says. DuPont lost on this issue, as the government chose to average only three years, starting in 1998.

The company ended up a central player in the U.K. trading scheme anyway. When the government held its reverse auction in March 2002, the U.K. put up about $340 million to generate official greenhouse-gas allowances. DuPont got about $40 million of the total, making it the second-biggest recipient of the government money, behind Britain's Ineos Fluor Ltd.

Most of the approximately 20 greenhouse-gas trades DuPont has done so far have been in Canada and the U.S., whose governments haven't imposed emissions caps. Typically, DuPont sells credits to a company that has pledged to cut its emissions, often for public-relations reasons, but hasn't been able to come up with all the promised cuts on its own.

One sale was to Entergy Corp. In 2001, that New Orleans-based energy concern announced it would hold its CO2 emissions to their 2000 level through 2005. The idea was to convey to the public that Entergy took global warming seriously, and to send a message to politicians that trading credits was the most efficient way to encourage industry to cut its greenhouse-gas output.

Entergy knew it would need to buy some credits to meet the goal. Mr. Routliffe approached Entergy in early 2002.

Entergy was particularly interested in credits DuPont had generated by reducing nitrous-oxide emissions from an adipic-acid plant in Orange, Texas. The factory bought electricity from an Entergy power plant just a few miles away. Though it wouldn't matter to the climate where the credits came from, the idea that Entergy was offsetting emissions with reductions made nearby seemed "a perfect fit," says Marty Smith, Entergy's director of environmental policy.

Entergy also was pleased that the credits came from emissions cuts DuPont had just finished making. In the parlance of the trade, they were "vintage" 2001.

That was only the first step in a deal that took six months to complete -- not unusually long for a commodity as strange as this one and in the absence of a government-sponsored market. DuPont hired an outside verifier to examine the provisions and confirm that DuPont had really made the cuts. The verifier produced a clean report for the deal, and in late 2002 DuPont and Entergy inked their pact: 125,000 tons of CO2 equivalent, at a per-ton price that Mr. Routliffe identifies only as between $1 and $5.

That translates into revenue for DuPont of no more than $625,000 -- "not even close" to what it has spent to cut nitrous-oxide emissions from its Orange plant, Mr. Routliffe says. But DuPont was making the emission reductions anyway, and at least it got something. "They were buying the house we already built," Mr. Routliffe notes.

An internal "climate-change steering committee" at DuPont, managed by Mr. Findlay, reviews big trades before they're made to be sure they don't hurt an environmental reputation DuPont has been cultivating for years. "Being perceived as a cabal that benefits from pollution -- that's the big" concern, he says.

Mr. Routliffe is on the lookout for his next greenhouse-gas play. One idea is to bundle emissions credits with a DuPont product, using them as a marketing tool. Another active greenhouse-gas trader, BP PLC, does just that. It sells a grade of premium gasoline in Australia that it markets in part by noting that it invests a bit of the proceeds to buy greenhouse-gas offsets.