The Nuts and Bolts of Carbon Trading

How does carbon trading work, and how can my company begin doing it?

Gil: Wikipedia defines emissions trading as "an administrative approach used to reduce the cost of pollution control by providing economic incentives for achieving emissions reductions." (Check out the long backgrounder there.)

Carbon trading is probably the most familiar of the tradable emissions.

According to the Leonardo Academy,

Emission reduction credits (ERCs) are given to recognize actions taken to reduce pollution. The amount of the credit corresponds to the amount and type of emission reduction. Credits can typically be sold, traded, or banked for future use.... A company can offset its own emissions by causing a reduction or sequestration of emissions outside its operations. Similarly, consumers and businesses can "offset" the pollution caused by their energy use by buying and retiring the emission reduction credits created by someone else.

The incentives: If you can efficiently reduce your emissions, you can gain additional economic advantage -- beyond, for example, direct energy savings -- by selling those reductions to another party who finds it more economical to offset their own emissions than to reduce them.

Critics charge that this is just a scheme to shift pollution geographically. And the growth in trading by Russia -- where economic decline rather than efficiency improvement has been the main driver of pollution reduction. On the other hand, according to the New York Times, "Russian industry is generally wasteful with energy, so that a few cheap upgrades go a long way to reducing emissions. Thus, with both outdated equipment and a surplus of carbon emissions [due to economic decline], Russian companies have become attractive to European, Canadian, and Japanese companies that need emissions credits."

In addition, Leonardo observes: "Individuals and businesses can reduce pollution by buying and retiring emission reduction credits/emission allowances/offsets without emitting any pollution."

In any case, "Stable totals are critical to a stable market," according to Wikipedia. "A critical part of emissions trading is that the amount of emissions must be fixed, or controlled in some socially-agreed fashion." Hence the Kyoto Protocols.

What you need to do:

1. Establish an emissions baseline -- how much do you generate? What are they main sources? What are your trends over time?
   
   
2. Set a specific reduction goal. The existence of a concrete goal (meaning, for example, a goal of "reducing greenhouse gas emissions by 15% below 1990 levels," not simply "lowering emissions") makes measuring progress and determining success or failure much simpler. And don't set the goal comfortably low. Dupont plans to reduce GHG to 65% below 19990 levels by 2010; ST Micro is going for 100%; and Sweden plans to be off fossil fuels by 2020.
   
   
3. Identify efficiency opportunities through systematic assessment of your operations. Look beyond direct energy use (what about employee commuting? your supply chain?).
   
   
4. Prioritize your reduction opportunities, but don't consider each measure in isolation, since whole systems strategies can deliver multiple benefits for the same dollar.
   
   
5. Implement those opportunities -- again, with an eye to the design and sequencing synergies that can yield far better ROIs that step-at-a-time piecemeal efforts. (See, for example, my article "Tunneling Through the Efficiency "Barrier": The Hits Keep Coming")
   
   
6. Measure the results -- but remember, the value of measure is not just to report your results; performance feedback to your team is one of the best ways to ensure effective implementation.
   
   
7. Verify the results (usually through an independent third party).
   
   
8. Sell your reductions on a trading exchange.

(Actually, look into these last two before you start, since your verification and trading partners will have specific procedural requirements that you will have to meet.)

Some resources:

• ClimateBiz -- Emissions Trading
  A wealth of information on emissions trading, including backgrounders, tools and resources, and links to relevant organizations.
  
  
• Climate Neutral Network
  "Certifies products, services and enterprises [that] reduce or offset the greenhouse gas emissions with which they are associated and achieve a net zero impact on the Earth's climate."
  
  
• Chicago Climate Exchange
  "The first U.S. voluntary pilot program for trading of greenhouse gases" commodity exchange.
  
  
• Point Carbon
  News and views on carbon trading.

For the bigger picture -- beyond just carbon -- see Katoomba Group's Ecosystem Marketplace tracks " transactions, pricing trends, and buyers listings across 14 markets where ecosystem services are paid for. Markets are arranged under the categories of biodiversity, carbon, and water."

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Gil Friend, systems ecologist and business strategist, is president and CEO of Natural Logic, Inc. -- offering advisory services and tools that help companies and communities prosper by embedding the laws of nature at the heart of enterprise. Sign up online to receive his monthly column via email. Read Gil's blog here.