Congress hasn't come up with a plan for limiting greenhouse-gas emissions, but U.S. companies are wagering billions of dollars that it will.
Convinced that rules aimed at slowing climate change are inevitable, coal-fired power generators are reexamining construction plans, fund managers are raising billions of dollars to invest in projects to combat climate change, insurance firms are devising new products and at least one utility has inserted a novel global-warming provision in a contract.
"It's a matter of when, not if," said Paul Hanrahan, chief executive of AES in Arlington.
The companies are moving now as Senate committees consider five bills that would create a cap-and-trade system, which would issue tradable allowances for limited greenhouse-gas emissions. So far, 21 major corporations have joined a coalition pressing for "immediate action to enact mandatory national legislation."
The Bush administration's opposition to all the mandatory-cap-and-trade proposals hasn't deterred the flurry of activity in executive suites. Wall Street also is mobilizing, with attention to climate change at investment banks such as Goldman Sachs, insurance firms such as Marsh and hedge funds such as Cheyne Capital Management. Clifford Chance, a London law and consulting firm, estimated that the value of credits traded in the voluntary market would increase 16-fold, to $400 million, this year and swell to $3 trillion by 2010, even without legislation.
Cap-and-trade system
Among utilities, AES, which owns facilities in two dozen countries, has formed a partnership with General Electric to invest in U.S. projects that will eliminate 10 million metric tons of existing greenhouse-gas output a year by 2010, primarily by reducing emissions of methane, a potent greenhouse gas. Those projects would generate credits that could be sold in a cap-and-trade system; until then, the credits will be sold in the voluntary market for credits.
Wisconsin Energy, a Milwaukee utility, sold its nuclear plant to FLP Group in December, writing a novel stipulation into the deal. Under the terms, Wisconsin Energy would own for seven years whatever credits might be given to the plant for generating electricity without emitting carbon dioxide. After that, the two companies would each get half of the credits.
Companies are also taking a tougher look at plans for new coal plants, which produce a lot of carbon dioxide. The prospect of potentially costly greenhouse-gas regulation was one factor in a pledge made by the private-equity firms that are buying Texas utility TXU to shelve eight of the company's 11 proposed coal plants.
The money flowing into investment funds focused on climate-change issues still pales next to the huge amounts of capital flowing into conventional energy projects that emit carbon dioxide. But a growing number of influential banks and industrial firms have vested interests in projects tied to limiting greenhouse gases.
Mark Schwartz, former chief executive of Soros Fund Management and former chairman of Goldman Sachs Asia, has teamed with Jesse M. Fink, co-founder and former chief operating officer of Priceline.com, to start a $300 million fund called MissionPoint Capital Partners to invest in projects related to climate change.
$1.5 billion invested in 'clean technology'
Goldman Sachs said it has invested $1.5 billion over the past two years in what it calls "alternative energy" and "clean technology." These investments promise good returns without new regulations, a spokesman said.
One investment that depends more heavily on climate concerns: a $2 billion coal gasification power project. Goldman subsidiary Cogentrix Energy last month signed a letter of intent to become the lead equity partner in the Texas power plant that would separate carbon dioxide from other emissions for use in enhanced oil recovery or underground storage. This will make the plant more expensive, but the technology could pay bigger dividends if regulations put a premium on global-warming gases.
Goldman has also invested in a wind-farm developer; a solar photovoltaic cell maker; a wind turbine manufacturer; a cellulosic ethanol firm; and the Chicago Climate Exchange, where U.S. companies trade carbon credits on a voluntary basis.
In the insurance sector, where companies have taken heavy hits from hurricanes whose increasing frequency is blamed on global warming, many firms are coming up with new climate-change products, such as insurance against business or political risk for projects to reduce greenhouse-gas emissions in developing countries.
Europe's already functioning cap-and-trade system for greenhouse gases has been a catalyst for investment funds and financial service firms, creating an infrastructure for a future U.S. regulatory system. Natsource's advisory arm said earlier this month that the European greenhouse-gas market -- including traded allowances and credits -- totaled $30 billion last year.
An early entrant, EcoSecurities, was founded in 1997 by a Brazilian biologist and an American political economist. The Oxford, England, firm pioneered projects whose impact on greenhouse-gas emissions could be measured and sold to voluntary customers in industrialized nations. Today, it has more than 200 employees worldwide and has commitments to buy 150 million to 160 million tons of greenhouse gases through 2012 -- a little more than the annual emissions of Argentina -- to sell in Europe's nascent carbon market.
Carbon regulation 'in the works'
Carbon Credits like these help create an intricate financial infrastructure for the greenhouse-gas business. Insurance giant AIG, for example, last year provided a letter of credit that helped project developer Natsource buy seven years' worth of credits from two Chinese companies and resell the credits to 20 European firms. (Natsource manages a more than $600 million fund whose investors include Google co-founder Sergei Brin and energy firms in Europe, Japan and the United States.)
"It is becoming clear that the carbon-constrained economy has arrived and carbon regulation or climate-change regulation in the United States is clearly in the works," says Eron Bloomgarden, U.S. director for EcoSecurities. "That presents both opportunities and risks for companies. So companies that recognize those opportunities can capitalize on them, and those that don't will suffer."
Sometimes it's hard to gauge whether a company intends to cut greenhouse-gas output or to save energy costs.
In the steel industry, for example, energy makes up 20 percent of the cost of production, according to Andrew G. Sharkey III, president of the American Iron and Steel Institute, even though the amount of energy used by U.S. steel plants has dropped 40 percent over the past 25 years. Companies are still looking to cut energy use even further.
Reducing energy use "may not be driven by [concern about] greenhouse gases, but there are benefits on that side, as well," says Louis L. Schorsch, chief executive of Mittal Steel USA.
The next presidential election could add to the momentum for a cap-and-trade system. Republican candidate Sen. John McCain of Arizona and Democratic candidates have all said that the federal government must act to slow climate change.
Reversal from Bush administration's stance
That would be a reversal from the Bush administration's stance. "The position we've taken to date is that we're opposed" to a cap and trade system, said Clay Sell, deputy secretary of the Energy Department. "The view of our administration is that we have to think of the challenge of greenhouse gases in a global context."
That's shorthand for saying that the United States shouldn't adopt a system without the big developing economies, especially China and India. At the moment, the chances of doing that appear remote.
Even if congressional or White House action doesn't materialize, many U.S. companies could fall under cap-and-trade systems at home, as well as in Europe. The Regional Greenhouse Gas Initiative, a group of Northeastern states including Maryland, is planning to launch a cap-and-trade system in 2009.
The first auctions of allowances for producing carbon dioxide could be held even sooner. Véronique Bugnion, U.S. research director for the Oslo consulting firm Point Carbon, said companies with operations in states adopting the regional initiative will have to figure out how much to bid and how to finance purchases. Utilities, for example, will have to make bids before they are able to pass along costs to consumers.
"We're certainly assuming that demand for clean energy and energy efficiency is going to increase on account of concerns over climate change," said Whittaker of MissionPoint. "We have a sort of implicit assumption that there will be a cost of carbon in the United States, and we fully expect there to be a cap-and-trade system at some point."