Friday, December 17, 2004

Pollution Poker

Pollution Poker: Carbon Trading Responds to the Kyoto Protocol

John Acheson

San Francisco State University


Throughout civilization, it has been free to pollute greenhouse gases into the atmosphere, but on February 16, 2005, organizations agreed to start paying to have their “garbage taken out.” The Kyoto Protocol called for 55 industrialized nations of the 127 that ratified the agreement. Starting in 2008 through 2012, most developed countries have agreed to reduce emissions levels over 5% below global levels in 1990. Carbon Dioxide has been targeted as the leading cause of global warming and has grown over 150% in the past 200 years. The United States has released more greenhouse gases than any other country in the world, but decided not to ratify the Kyoto Protocol as early as 2001. With the U.S. uninterested, the instrument, originally drawn up in 1997, did not have enough polluters signed on. The plan stalled, until Russia moved to sign on November 4, 2004. On February 16, 2004, eight years after the historic meeting in Kyoto, Japan and 90 days following Russia’s President Vladimir Putin’s historical signing, the agreement will come into full force. For the first time in the history, businesses have initiated investment into a new market for “carbon credits” that give industrialized countries the right to pollute. This paper examined the carbon trading industry at its infancy: a critical time of growth from start-up to mainstream. With the Protocol expected to jump start activity in early 2005, there was already a tremendous growth of carbon trading around the world. The case writer focused on the key players and global opportunities, as well as some of the broader mechanisms for implementation.


“For strategic reasons, some companies have chosen to be quiet about their efforts
under the Kyoto Protocol’s more stringent emissions regulations
(Packard and Reinhardt, 2000).”

Carbon credits allow companies to pollute. Firms who pollute can buy, sell and trade for the right to pollute in a manner similar to stock market trades. Polluters from 55 developed nations must buy credits or invest in projects that will reduce emissions or pursue a combination of socially responsible activities such as trading credits with a partner from a developing country. Clean projects such as renewable energy and forestation in designated areas, can generate additional credits. From virtually nothing, a new commodities market sparked by the Protocol created trading platforms that could grow to an estimated hundreds of billions of dollars. Firms in gross polluting countries such as Japan have been buying credits even before the Protocol went into effect. Activity has grown in anticipation of 2008 and is expected to grow throughout 2012, the treaty’s commitment period.

Macro Forces

The most significant forces that influenced the carbon trading market were political and economical. Internationally, different countries polluted at significantly different levels, and some guidelines created a feeling of discrimination. Annex B countries included developed nations including 15 EU states, US, Canada, Hungary, Japan and others. Those developed countries were mandated to reduce emissions to specific targets (See Table 1).
Table 1
Countries included in Annex B to the Kyoto Protocol and their emissions targets
Country Target (1990** - 2008/2012)
EU-15*, Bulgaria, Czech Republic, Estonia, Latvia,Liechtenstein, Lithuania, Monaco, Romania,Slovakia,Slovenia, Switzerland -8%
US*** -7%
Canada, Hungary, Japan, Poland -6%
Croatia -5%
New Zealand, Russian Federation, Ukraine 0
Norway +1%
Australia +8%
Iceland +10%
(United Nations Framework Convention on Climate Change)

Policy tensions became an issue when the President of the United States refused to sign the Protocol. He stated that it would impact the U.S. economy negatively. In an article release two days after Russia signed, White house officials including James Connaughton, chairman of the White House Council on Environmental Quality defended Bush’s position in terms of protecting the $400 billion and 5 million jobs that the Kyoto Protocol would cost the U.S. (Heilprin , 2004). President Bush also complained that the Protocol was not fair. Since smaller countries were relieved from its impacts, Bush argued that the brunt of responsibility fell on developed countries.
In terms of the economic impact, business had every right to claim that the Kyoto Protocol was unfair. No matter what, it would raise prices and impact the bottom line. But, as consumerism shifted towards a more socially responsible stance in many industries, for example increased demand for clean hybrid automobiles and renewable energies, U.S. firms have joined the efforts and have volunteered to reduce emissions. The argument was that it helped stakeholders, and in fact stockholders have a new metric (carbon credits) from which to analyze firms. In the short run, there is no doubt that the impact of the Kyoto Protocol would raise the costs of doing business for several industries, including many politically charged ones such as steel and aluminum as well as the majority of manufacturing and energy production.
With energy prices reeling from an all time high in 2004, political and economic forces from the Kyoto Protocol would raise the world’s costs of doing business starting in 2005. The U.S. policy against the Protocol has left firms to pursue carbon trading on their own, or fall behind other developed countries like Japan.


Two extreme views toward the Kyoto Protocol (KP) emerged during 2004: one of support and one of skepticism and resistance. Having invested millions into projects geared towards buying credits or funding projects in developing countries, Japan was one of the highest polluting developed countries that took a pro-KP stance into 2005. But the U.S. held steady to economical reasoning and firmly believed that the KP would hurt. Other developed countries including many European members, admitted that there would be economic impact, but moved forward with projects under KP guidelines.

United States

The leading opponent to the Kyoto Protocol emphasized negative economic impact, while scientists and environmentalists got caught up in another argument. Most agreed that the impact would significantly raise the costs of doing business, so politicians successfully shifted debates towards the causes of global warming. Although scientists and environmentalists disagreed on the evidence that pollution caused global warming, the policy effectively steered the argument towards science and away from economics.
As the largest polluter in the world (36% of global emissions), there’s no doubt the impact of the Kyoto Protocol would hit the U.S. quite hard. Environmentalists pointed the finger at bad science and a poor social responsible political stance In light of the scientific debate, a fiscal policy could be blamed for the holdout policies. Politicians have focused on the potential rise in the costs of business and jobs. Still recovering from terrorist attacks and having experienced an expensive oil war financed by a tremendous deficit, most analysts agreed that the Kyoto Protocol would simply hurt the American economy.

Japan was one of the leading polluters on the list of Kyoto’s developed nations. The country supported ratification and invested into carbon trading activity faster than any other country. As a first-mover in carbon credits, Japan already amassed billions in carbon resources. Most of Japan’s large multinationals aligned with financial and governmental institutions to create intermediaries that had already purchased large quantities of carbon credits. The organizations had cut many deals from other markets, key players and exchanges. In addition, entities were already pooling and setting aside cash to fund future carbon trading activities. Japan’s policy seemed quite practical, with a common goal of meeting the Kyoto Protocol with a vision that aligned stakeholders from all sectors of society.
And Japan wanted to take polluting a step further. The government hoped to get consumers involved. The country’s Environment Ministry called for a plan that added customers to the carbon trading value chain. A proposed policy included new “carbon taxes.” Additional costs passed to consumers were proposed on fossil fuels, energy and electricity. For example, an oil tax added to the pump price for gasoline, or an additional tax on utilities. The rise in monthly expenses for a typical Japanese household was estimated at $30 at 100 yen per U.S. dollar (Japan Times, November 11, 2004).
Japan, home to some of the world’s largest manufacturing and polluting industries acted fast to meet Kyoto Protocol requirements. And by proposing to get consumers involved, Japan’s policy making generated a new tactic that brought the end-user into the carbon trading value chain. The pro-KP stance suggested that pollution was everyone’s problem, not just business.

Carbon Trading Industry

The goal of the carbon trading industry is to reduce global warming by providing the right to buy, sell and trade pollution. Exchanges allow companies in any country and industry to trade carbon and currency. Direct deals are another way to conduct business between organizations to generate carbon reductions. The industry allows global cooperation.
Credit trading grew around the world in 2004. Even the U.S. traded credits along with coalitions of Asian governments and Europeans. The Japanese were first-movers, as several large firms pooled millions in investment dollars to manage funds that would buy credits from Community Development Mechanism (CDM) partners.
Internal trading was also been instituted by large multinational players with multiple business units in different countries. BP Amoco announced voluntary goals to cutback carbon dioxide emissions; it setup a program that required business units to trade greenhouse gas levels in-house (Packard and Reinhardt, 2000).


The market for carbon credits was estimated at $200 million at the end of 2004, and projected to grow to $10 billion by 2007 by energy consultant, Point Carbon (Carr and Coulter, November 8, 2004). The EU has announced allowances over 2 billion tons worth 20 billion euros for 2005 (Ibid). The price per ton for the right to pollute carbon ranged from $1 in the U.S. to $11 in Europe. Growth reported by an emissions broker in London was reported at 140,000 credits in August, 1 million in September and 1.7 million tons in October (Ibid). In the United States, trading grew from 400,000 in September to October to over 1.7 million credits while the price jumped over 70% to $1.72 per ton (Carr and Coulter, 2004; Gibson, 2004).
“We are putting a price on pollution,” said Richard Sandor,
creator of U.S. Treasury futures at the Chicago Board of Trade
(Appelbaum, November 2004).

Even though the U.S. did not ratify the Protocol, volunteers lined up to join the Chicago Climate Exchange (CCX). Founded by financial futures pioneer, Sandor, the trading platform attracted 70 members including Baxter Healthcare, Ford, IBM, and the city of Chicago. The members have pledged to reduce carbon by 1% per year through 2006, and the exchange put a lower price on the U.S. version of the new global commodity. In its first nine months of operations, members exchanged over one million tons of carbon valued at several million dollars by the close of 2005 (Appelbaum, November 2004).
The CCX is viewed as a pilot program and its early success showed that members drove volume even before the Kyoto Protocol went into effect. The activity suggested that the U.S. market had acted on its own, and firms have adopted social responsibility voluntarily. It was not clear if the actions were driven by anticipation of U.S. ratification or environmental concerns.
By 2005, Sandor had looked to the EU to expand his platform and negotiated with London’s International Petroleum Exchange. He attracted E.CON, Royal Dutch/Shell Group, Britain’s largest steelmaker and other interested firms (Carr and Coulter, November 8, 2004).

Key Players

Several industries have been affected by the Kyoto Protocol. With interconnected global supply chains, the cost of doing business has increased across a variety of businesses. Japan’s proposed policy that added the customer to the carbon value chain implied that the effects of the Protocol would probably reach further than expected. Some of the key players that have conducted carbon trading by the end of 2004 have been profiled here.

• Japan, Netherlands, Europe, U.S. and the World Bank


• Latin America: Argentina, Brazil, Chile, Colombia, Panama, Costa Rica and Peru
• Eastern Europe: Austria, Romania
• Asia: Phillipines, China (world’s 2nd largest polluter), India

Major Industries.

• Automakers: GM, Ford
• Energy companies: Exxon-Mobil, BP, Shell, Matsushita Electric Industrial Co.
• Manufacturers: Factories that created emissions i.e. steelmakers
• Financial: The World Bank, Mitsui & Co.

Exchanges and futures markets have also created a new group of carbon credit management opportunities. Brokers, commodities traders, equity managers, and bankers were some of the human resources thrown at defending the Protocol. For example, some entities have avoided use of the carbon exchanges and have traded carbon credits directly: firms in developed countries have privately bought carbon credits from groups of projects in developing countries.

Brokers and Consultants.

For conducting deals between a CDM and multinational, several consultants and brokers have conducted large transactions in the tune of millions of credits. Cantor Fitzgerald, L.P.’s subsidiary, exemplified one such brokerage: has offices in London, Toronto, Tokyo and the USA, together with local representation in many other countries through agency agreements. The company brokers greenhouse gas emissions allowances and credits globally, plus many other environmental commodities and instruments in different jurisdictions across the world. has brokered tens of millions of tonnes greenhouse gas offsets and has become a globally recognized market leader (Kendrik and Messina).


There were two areas of opportunities in the growing billion dollar business of carbon trading: financial trading opportunities and projects that reduce or eliminate carbon in developing countries. Carbon trading exchanges have been discussed earlier. For this section, strategies for foreign direct investment (FDI) was the focus. Under CDM guidelines, developed countries invested billions of dollars into projects in the developing world. Most were energy projects in Latin America that replaced existing power plants with cleaner alternatives.

Clean Development Mechanism
CDM has been the largest opportunity for key players that want to get involved in projects that satisfy the Kyoto Protocol. The requirements call for sustainable projects in developing countries. For example, sugar cane waste fired energy plants in Brazil and reforestation projects more commonly know as “sinks” in South East Asia. Forests or sinks were the only projects that cleaned the environment. Producers that have received CDM status had little problem selling their credits to international buyers from around the developed world.
CDM proposals grew fast in 2004. According to Canada’s CDM & JIO Office, there were several opportunities created by the Kyoto Protocol (Canada’s Clean Development Mechanism & Joint Implementation Office, 2004). CDM project guidelines were reported as follows:
• Increasing energy efficiency
• Renewable energy
• Electricity production
• Oil and gas production
• Alternative fuels and gases
• Waste management
• Afforestation and reforestation (Canada’s Clean Development Mechanism & Joint Implementation Office, 2004)

The Asian Development Bank described the following criteria for CDM projects in Asia:

A project should meet three essential requirements to qualify as a CDM project: reduce emissions below the level in the absence of the project, be located in a developing member country (DMC) of the Asian Development Bank (ADB), and provide benefits that contribute to sustainable development in the DMC (Asian Development Bank, 2004).

In Latin America, some examples of planned activity and projects underway included:

• Peru: 19 projects with investments planned at $935 million dollars including the replacement of coal and diesel fired power plants with hydroelectric
• Columbia: 15 projects including a wind energy plant
• Brazil: thermoelectricity powered on plant carbon from reforestation
• Mexico: 4 hydroelectric dams (Lasso, 2004)


Some manufacturers responded to the Kyoto Protocol with new technology. Toyota for example, researched and developed Hybrid Electric Vehicle technology pushed by the first KP meeting. The R&D successfully became a consumer product called the Prius automobile. Toyota utilized socially responsibility and technology in designing the Prius that produced 90% less emissions than typical cars. It won “Car of the Year” in both America and Europe, and the prestigious Economist award:
The Economist recognized the following leader for launching new markets and revolutionising the way business is done:

Energy and the Environment, Prius hybrid automobile: Takeshi Uchiyamada, Director, Toyota Motor Corporation. Acting under a Toyota directive to create the lowest emissions vehicle possible, Uchiyamada in 1994 became leader of a project dubbed G21, for Global 21st Century. Toyota gave Uchiyamada a free hand in the design of a new automobile, unbound by traditional restraints such as component sharing, marketing considerations and project hierarchy. Uchiyamada's team initially developed an automobile that employed both an internal combustion engine and electric motor, working alternately or together, engaged with a clutch. Later, some 80 research engineers (working to meet a deadline of the 1997 Kyoto Conference on global warming) reviewed multiple engine designs to develop what eventually would become a full-production vehicle. By 2002, Prius sales had topped 100,000 units worldwide (Evenson, September 14, 2004).


From energy producers, to manufacturers, and even consumers in Japan, carbon trading will impact value chains all over the world. The economic jolt will increase FDI flows. With the costs of doing business projected to rise 10-30%, the Kyoto Protocol could be a contributing factor that increases global prices starting in 2005. In the U.S. most operations are linked to international suppliers and interdependence could also create an upturn in costs. Combined with the currency crisis and sensitive policy issues, the United States of America may be poised for inflation and/or a recession at the same time the Kyoto Protocol goes into effect.
On the other hand, the developing world and the environment are enjoying the attention. CDMs will create jobs and economic growth; they will build clean projects that can provide developing countries with a new model for society. Sustainable living combined with high technology might become a reality in Latin American and South East Asia. Electronic carbon trading exchanges are using this new model to add social responsibility to global value chains.
With the fossil fuel model for industrialization waning, the Kyoto Protocol might come to define the physical turning point from the industrial age to the information age. As oil and other banked energies run critically low within a century, the world’s power might in fact become de-centralized. At the same time knowledge is being networked virtually. This new world could run on information and not oil. If knowledge becomes a natural resource and continues to flow freely into developing nations, global villages may become a reality.
The Kyoto Protocol is hurting the world’s developed nations, but it’s already stimulating the developing world. More importantly, the globalization of socially responsible values in the private and public sectors, and across multiple industries and country lines, might be argued as the largest macro force that has ever pushed Earth’s environment towards sustainability.

Appelbaum, A. (2004, November). What’s your carbon worth? Ask Richard Sandor [Electronic version]. Fast Company, Issue 88, November, Page 38.

Clean development mechanism facility (2004). Retrieved November 9, 2004 from Asian Development Bank’s Web site:

Carr, M. and Coulter, R. (2004, November 8). E.ON wins, hydro loses as EU prepares pollution limit. Retrieved November 8, 2004, from

Editorial (2004, November 11). Rationale for a carbon tax Japan Times via LexisNexis Retrieved online on November 11, 2004.

Evenson, L. (2004). The Economist celebrates new routes to innovation at the 3rd annual Innovation Awards and Summit in San Francisco. The Economist, September 2004. Retrieved November 9, 2004, from Business Wire, Factiva,

Gibson, K. (2004, November 17). Chicago climate exchange bears fruit in Europe. Retrieved November 18, 2004, from, Inc.

Heilprin J., (2004, November 13). Bush stands by rejection of Kyoto treaty. Washington Dateline. Retrieved November 14, 2004, from Associated Press,

Kendrick, T. and Messina, D. CO2e combines Kyoto Protocol and European Union Emissions Trading Provision for another landmark transaction to reduce greenhouse gas emissions. Retrieved online.

Lasso, M. A. (2004, November 24). Is Latin American really a carbon market pioneer? Inter Press Service News Agency, Retrieved November 24, 2004, from

Packard, K. O. and Reinhardt, F. (2000, July 1). What every executive needs to know about global warming. Harvard Business Review.

Canada’s Clean Development Mechanism & Joint Implementation Office, Question and Answers (2004). What type of projects qualify under the CDM and JI? Retrieved November 9, 2004 from

United Nations Framework Convention on Climate Change: Essential Background, Kyoto Protocol. (n.d.) Retrieved December 15, 2004, from

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