Wall Street Journal, May 13, 2008

by George Anders

Ten years ago, anyone advocating a national system of trading greenhouse-gas emission rights would have seemed like a zealot on the fringe, with no idea of what the American business community could tolerate.

Times sure have changed.

Such proposals have entered the political mainstream. Not only do Democratic presidential candidates Barack Obama and Hillary Clinton want to create a national market for permits to discharge greenhouse gases like carbon dioxide. So does John McCain, the likely Republican nominee.

This week, Mr. McCain endorsed the view that such trading arrangements could nudge companies to cut emissions substantially over the next 40 years. That contrasts sharply with President Bush's stance; he opposes legislating a "carbon market."

Just as importantly -- but with much less fanfare -- many business leaders in the U.S. have decided that a well-constructed carbon market might be the way to go. There's lots of debate about the details and concern about the perils of a badly designed system. But for many executives, an idea that once seemed preposterous or menacing now looks intriguing.

"A lot of American industry has progressed in its thinking on these issues," says Steven Leer, chairman and chief executive of Arch Coal. He welcomes U.S. initiatives to control carbon emissions, as long as they are tied to overall energy security and eventually are matched by similar efforts world-wide.

Executives' new open-mindedness can be tied in part to the changing scientific landscape. Evidence has piled up in recent years tying increased industrial production of carbon dioxide to global warming. The debate isn't totally over, but the connection appears strong enough for executives such as Mr. Leer to declare: "Go ahead. Let's get on with it."

Meanwhile, plenty of companies have refined or retooled their business models so they can profit from the emergence of a "green economy." At The Wall Street Journal's ECO:nomics conference in March, companies as diverse as Procter & Gamble and Duke Energy talked about ways they are positioning themselves as environmentally friendly.

Areas like solar energy and clean-coal technology are booming. Even approaches that aren't profitable yet are being nursed along by a flurry of venture-capital investing and government subsidies.

Most proposals for a carbon market would set nationwide caps on carbon-dioxide emissions, which would be gradually reduced, year by year. Companies would get a fixed number of annual emission permits, based on their energy output.

A "cap and trade" market would then ensue. Companies with more permits than they needed could sell them at a profit. Companies in danger of exceeding their emissions limit would need to buy extra permits at market prices -- or maybe earn credits by taking steps to reduce carbon output elsewhere.

For electric utilities that rely on relatively clean sources of power, a cap-and-trade system could be a bonanza, letting them raise money by selling unneeded permits. Calpine, which runs natural-gas-fired plants, told investors earlier this year its gross margins would improve if Congress passed greenhouse-gas legislation.

Utilities that rely mostly on coal-fired plants would like to get a free allotment of permits at the start, so their costs don't go up. Those that generate lots of nuclear power would rather have the government charge for permits, making life tougher for their competitors.

Of course, in setting up a cap-and-trade system, the devil is in the details. The European Union has been operating a carbon market since April 2005, with mixed results. It issued lots of free emissions permits to utilities, making the program palatable. But that's meant the permits have sometimes traded at such low prices that buyers weren't motivated to look for other ways to cut emissions.

Nor have business skeptics vanished. The National Association of Manufacturers issued a study in March, asserting that a greenhouse-gas bill drafted by Sens. Joseph Lieberman and John Warner could reduce economic output, cost jobs and contribute to rising electricity and gasoline prices. But NAM's study appears to have been based on shaky assumptions, predicting that retail gasoline prices would be an inflation-adjusted $2.13 a gallon in 2020 without the bill, and as much as $3.59 with it. Thanks to a surge in oil prices, gasoline already has shot up to about $3.70 a gallon.

Such runaway energy prices contribute to the willingness to consider more-aggressive steps to reshape U.S. energy consumption.

At Chevron, Andrew Mingst manages the oil giant's carbon-market activity. The company trades regularly in the European carbon market and is seeking carbon-offset allowances through the United Nations for a geothermal project in Indonesia that generates clean energy.

Mr. Mingst expects new carbon markets to emerge in Australia and Canada, perhaps before a U.S. market takes shape. "This is a big area that could get a lot bigger," he says.

In fact, Chevron would like to see carbon markets gain the ability to trade contracts reaching as far as 10 years in the future. That way, Mr. Mingst says, energy companies could make long-term decisions with confidence about how to build or refit refineries and other projects.

Write to George Anders at george.anders@wsj.com