Big business and global warming

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Seeing green

The environment

BIG business, especially in America, has long been suspicious of claims that the globe is warming. Oil companies have noisily rubbished the science of climate change. Electric utilities have tried to stoke fears among ordinary folk that the Kyoto Protocol, a UN treaty on climate change being negotiated next week in Germany, would cut economic growth and cost jobs. So it is all the more suprising that some of the world’s biggest companies are changing their tune. Leading the way are BP Amoco and Royal Dutch/Shell, two large European oil firms, whose bosses now state plainly what was once considered heresy: global warming is real and merits immediate action. A number of American utilities vow to find ways to reduce the harm done to the atmosphere by their power plants. DuPont, the world’s biggest chemicals firm, even declared in September that it would voluntarily reduce its emissions of greenhouse gases to 35% of their level in 1990 within a decade. What is going on?

These firms are the first to see that fixing global warming could give rise to the world’s next trillion-dollar industry: the greenhouse-gas trade. An agreement that surfaced this week gives a glimpse of how such a business might emerge. Ontario Power Generation, a Canadian utility, has struck a deal with Zahren Alternative Power, a small American firm, to purchase environmental “credits” to offset OPG’s emission of 2.5m tonnes of carbon dioxide, the principal greenhouse gas. Zahren creates these credits by capturing methane, another greenhouse gas, that would otherwise have escaped from landfills, and uses the gas to generate electricity.

This is but the latest in a serious of unusual transactions. Last year, American Electric Power, a big electricity utility, declared that it would spend $5.5m on protecting rainforests in Bolivia to offset emissions from its many coal-fired plants. In October a coalition of Canadian energy companies struck a deal with Iowa farmers to buy up to 3.3m tonnes of carbon dioxide credits. The farmers generate the credits by not tilling their soil; instead, they agree to inject seeds into soil direct. Doing so, say scientists, will prevent the release of up to four tonnes of the gas per acre every year.

Such deals are happening now because the Kyoto treaty has prompted three sorts of companies to push for the creation of a global market in greenhouses gases: the losers, the winners and the middlemen. The big potential losers from the treaty are the heavy-industrial firms and energy companies. For such firms, the introduction of carbon taxes or fees on emissions could prove devastating. They see deals to offset liabilities, though speculative, as an inexpensive hedge.

They are also promoting experiments in trading that should help persuade sceptics in government. BP Amoco, for example, has this year launched an internal carbon-dioxide trading scheme among its many far-flung divisions to help them meet targets for reducing emissions. Unipede, a coalition of big European electricity utilities, and the International Energy Agency in October completed a full-fledged simulation of electricity and carbon-dioxide trading.

The winners are those that can cheaply create what the losers desperately want: reductions in emissions. Though the science is evolving, it is clear that agribusinesses, forestry firms and others who can keep greenhouse gases from entering the atmosphere could profit handsomely from the Kyoto deal. This has set off a flurry of research. Siemens and Shell, for example, have just announced a new fuel-cell technology for oil rigs that will capture emissions of carbon dioxide and methane, generate power from them cleanly, and sequester the exhaust.

Middlemen are keen too. Already, lots of energy and commodity exchanges are trying to get into the act. London’s International Petroleum Exchange is promoting itself vigourously as the future home of global carbon trading; rival exchanges are also vying for the title. Banks and insurance companies worry that global warming increases the risk of catastrophes, but also spot an opportunity. Ivo Knoepfel of Swiss Re, a large reinsurance company, says his firm is keen to securitise international emissions-trading permits.

Keener still are energy- and commodity-trading firms. Peter Zaborowsky of Natsource, one of America’s biggest such firms, reckons that carbon trading will be a $60 billion-a-year market in America alone; and that if politicians agree on clear rules for international trading, the global market could in time reach a trillion dollars a year.

In the meantime, one group looks likely to make a fortune out of all the uncertainty: the consultants. Swiss Re’s Mr Knoepfel sees insurance companies rushing to get into the business of helping clients assess carbon liabilities and assets. Scientists are pocketing handsome sums advising on sequestration projects. Already, big accounting firms such as PricewaterhouseCoopers and KPMG have set up units dedicated to carbon consulting. Even green groups are profiting. As companies seek to win credibility for their efforts at reducing emissions, they are inviting mainstream green groups such as Washington’s Environmental Defence Fund to advise them and to keep them honest. For industrialists paying reluctantly to clean up their act, that must be a bitter pill.