Reaping a profit from the air

Times Staff Writer

When Doug Gronau looks out the window of his Iowa farmhouse, he sees a profitable investment in the effort to stop global warming.

Most people see cornfields.

His cropland, which he is prohibited from tilling, is a greenhouse gas credit, packaged and sold on the Chicago Climate Exchange. An anonymous trader snapped up the field’s ability to absorb carbon dioxide to offset -- on paper -- a tiny portion of the carbon dioxide emitted by some distant factory.

Gronau, 57, expects a check for $2,800.


“That may not sound like a lot,” he said, “but farming is hard and it adds to your margin.”

The Chicago Climate Exchange is the first and only legally binding carbon emissions market in North America. In the absence of federal controls on greenhouse gas emissions, it applies an axiom of economic theory to the problem of global warming: People in search of profit can be expected to do just about anything for a buck -- even save the planet.

That concept of the market forms the cornerstone of regulatory efforts to fight global warming.

Interest in carbon trading as an arcane but powerful tool to fight global warming has intensified after the release last week of a landmark United Nations report that found rising temperatures would continue to increase even if greenhouse gas emissions could be held to current levels.


The theory of the market is straightforward. For the right price, a farmer like Gronau will agree to cultivate his fields without plowing, so the soil retains carbon dioxide that would otherwise seep into the air. That “carbon credit” can then be purchased by exchange members and applied against their own emissions. Should the price of carbon credits climb high enough, the theory goes, company executives one day will find it cheaper to reduce their own industrial emissions.

It’s a new form of environmental bookkeeping that theoretically reduces emissions of carbon dioxide and other gases responsible for gradually rising global temperatures.

Since the exchange opened in 2003, almost 200 companies -- including Ford Motor Co., DuPont Co., IBM Corp. and Amtrak -- have volunteered to buy and sell the right to emit tons of carbon dioxide and five other key greenhouse gases.

California officials are beginning to frame market-based trading schemes, inspired in part by the Chicago Climate Exchange, to curb industrial carbon dioxide emissions by 25% over the next 14 years. State and federal regulators already use market trading to control the sulfur emissions responsible for acid rain.

Critics, however, question whether new carbon emissions markets have done anything more than generate profits for market traders while delaying genuine industrial changes that could forestall global warming.

In Europe, where mandatory greenhouse gas controls were recently imposed, the carbon emissions trading system has been marred by foot-dragging, chicanery and profiteering -- even as its sales reached $22 billion.

All that buying and selling did almost nothing to reduce the risk of global warming, records show. Indeed, global levels of carbon dioxide in 2005 were the highest ever registered.

“Have they achieved any real reductions in greenhouse gases?” asked Veronique Bugnion, U.S. research director at Point Carbon, a European firm that analyzes carbon trading markets. “There is not much evidence of a reduction.”


Carbon dioxide, the invisible, odorless gas that infuses every living breath, seems an unlikely investment. It seeps out anywhere there is a working smokestack or running motor.

Over the last century, it has accumulated to levels that humans have never experienced, altering how the atmosphere absorbs solar energy and traps its heat. In California, greenhouse gas emissions rose more than 14% from 1990 to 2004, the California Energy Commission reported.

As a signatory to the 1997 Kyoto Protocol, the European Union has taken the lead in imposing caps on levels of carbon dioxide and other greenhouse gases. Many climate experts expect the U.S., which accounts for about a quarter of all greenhouse gas emissions, eventually to have to follow suit.

After the release of the U.N. report, the Bush administration maintained its opposition to mandatory controls on U.S. greenhouse gas emissions, while Democratic leaders in Congress considered different approaches to control the heat-trapping gases.

Once companies are forced to pay to emit greenhouse gases, a commodity as free as breath becomes private property worth billions.

In the cost accounting of global warming, the undisturbed soil between Gronau’s rows of corn retains enough carbon to offset a few of the 2 billion tons spewing from U.S. smokestacks and exhaust pipes every year.

All told, Gronau set aside 1,600 acres of the 2,100 acres he usually farms near Denison, Iowa, as a no-till carbon sink through the climate exchange. That works out to half a ton of carbon per acre kept out of the atmosphere every year. He could have increased his credit to three quarters of a ton of carbon dioxide per acre by planting grass on his fallow fields.

“I believe sequestering carbon in the soil is valuable in itself,” Gronau said. “If there is benefit to the atmosphere, that is even better.”


His no-till fields were bundled for sale through the exchange with other farmland in Iowa, Nebraska, Kansas and Missouri in a program managed by the Iowa Farm Bureau, one of 23 carbon “aggregators” registered on the exchange. The farm bureau has packaged and sold 500,000 tons of carbon emission credits -- equal to a month’s output from a 1,000-megawatt coal plant.

Carbon credits can also be gained by burying carbon dioxide under the oceans or sequestering it underground, reducing emissions through new technology and alternative fuels, or reforestation, to name a few ways. Worldwide, there are more than 3,000 projects in the works to offset greenhouse gases, generating billions of dollars in revenue.

“When I was taught economics, I was taught that air and water were free goods,” said Richard L. Sandor, the founder of the Chicago Climate Exchange.

But he added: “It was intuitively obvious to me that on a planet of 6 billion or 7 billion people that was no longer the case.”

The firms that have volunteered for his exchange want to learn how to exploit the system in case mandatory controls are enacted by the U.S. government.

Once members promise to reduce emissions, however, the commitment is legally binding.

“The binding nature of the constraints is what makes the [Chicago] market work,” said carbon finance analyst Karan Capoor at the World Bank. “It provides the integrity. It is not just do what you want, wink, wink, nudge, nudge.”

Even as a voluntary exercise, the exchange has traded 13.6 million tons of carbon dioxide emissions with 200 companies, cities and foundations at prices ranging from $4 to $8 a ton.

As chairman and chief executive of the climate exchange, Sandor could easily become the first magnate of global warming.

Through a European subsidiary, his exchange already handles the vast majority of the annual carbon emissions trade with the 25 countries in the European Emissions Trading System.

Time magazine declared him a Hero of the Planet in 2002.

But Sandor has also come to embody the concerns of environmentalists over the business of global warming, in which the planet’s natural capacity to absorb carbon dioxide is turned into private property that can be sold to the highest bidder.

Last year 19 major environmental groups urged local governments to boycott the Chicago exchange. Their complaints are based in part on the track record in Europe, where 7,300 companies managing 12,000 installations scramble to survive in the world’s largest carbon market.

The European Union’s Emissions Trading Scheme handled $22-billion worth of carbon transactions in the first nine months of last year, the World Bank reported. Investors bought and sold 842 million tons of carbon dioxide emissions, trading recently at about $9.80 a ton.

But instead of combating global warming, the European trade has meant only higher prices for many utility customers, according to market analysts and environmental finance experts. “There are some pretty serious teething problems,” said Bugnion of Point Carbon.

Should the U.S. impose carbon limits, the resulting market for carbon emissions would be immense, analysts said.

Market researchers at the World Bank and U.N. experts predict that the trade in carbon emissions could soon become the largest commodities market in the world.

“Henceforth,” said Wesleyan University economist Gary Yohe, “carbon will always cost more tomorrow than it does today.”