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Sandor: It’s Time U.S. Benefits From Cap-and-Trade

The Waxman-Markey bill that narrowly passed the House in June had a cap-and-trade system at its heart. With the bill now in the Senate, much concern remains about whether capping greenhouse gas emissions will hurt the U.S. economy, especially during a period of fragile economic recovery. Debate remains intense. But key facts, often overlooked, may provide some perspective.

[IMGCAP(1)]First, not a foreign invention, cap-and-trade was invented here at home and exported to Europe and beyond. Second, far from being behind on the matter, through the Chicago Climate Exchange and the verified legally binding emissions reduction commitment made by more than 100 leading industrial companies that have operations in every state in our nation, the U.S. today has more greenhouse gas emissions under a cap in the United States than in any other single country in the world.

Third, not an experiment or gamble with the unknown, cap-and-trade has proved to be a success in managing environmental challenges at far less cost than expected. And fourth, while cost containment must be taken seriously, the U.S. has a major opportunity to harness the power of transparent, regulated markets and clear price signals to create incentives for new technologies that can improve our energy security, drive new jobs and help eliminate energy waste that is a hobbling contingent liability throughout our economy.

A historic moment is upon us, where science, technology and finance can merge for the greater good of all, state by state.

U.S. ingenuity brought us cap-and-trade in the first place, starting with the landmark Clean Air Act of 1990. The U.S. applied this innovative approach to cut acid-rain-causing sulfur dioxide emissions in the late 1980s and early 1990s, resolving this nasty environmental problem at far less cost than expected. According to the Environmental Protection Agency, cleaning up our air and water and reducing asthma saves more than $100 billion per year in health care costs. The EPA Web site is loaded with facts on the indirect benefits of this environmental triumph.

Climate change, of course, is not a regional issue like acid rain, and is a byproduct not of pollution per se, but daily normal activities that require fossil fuel use. However, the experience of the CCX has shown that cap-and-trade is not only doable — it is affordable and desirable — and visionary companies have already begun to manage their greenhouse gas emissions with future exigencies in mind.

Key innovative companies from all sectors, such as DuPont, Ford, Motorola, Baxter, Abbott, United Technologies, Honeywell, American Electric Power, Mirant, Puget Sound Energy, Safeway and Intel, have joined with more than 100 other industrial companies, representing 20 percent of the U.S. electric power sector and 17 percent of the Dow Jones Industrial, to make a legally binding commitment to reduce their emissions or buy credits to make up the shortfall. As a result, the CCX baseline has now surpassed 600 million metric tons, more than the national allocation plan assigned to Germany, Europe’s largest economy, under the European Union Emissions Trading Scheme.

In addition to these private sector entities, universities such as Michigan State and the University of Minnesota; cities such as Chicago, Portland, Ore., and Fargo, N.D.; states such as New Mexico and Illinois; and counties such as King in Washington and Miami-Dade in Florida have all begun monitoring, measuring and managing their greenhouse gases through the CCX. Today, there is a CCX member in every state in the nation, including farmers, foresters and financial institutions.

Regional mandatory initiatives are being developed, creating other proving grounds for further emissions cuts and regulation. The Regional Greenhouse Gas Initiative, under which 11 Northeastern and Mid-Atlantic states agreed to cap and then reduce CO2 emissions from the power sector by 10 percent by 2018, got off to a great start with its first auction this past fall. The Chicago Climate Futures Exchange, a Commodity Futures Trading Commission regulated market for environmental products, has seen RGGI trading volumes grow from averaging 251 contracts per day in 2008 to averaging 2,546 contracts per day so far in 2009.

All of these proactive solutions establish a price on carbon, which will make the difference between economic success and failure in combating global climate change. This price signal is critical as businesses and government seek to make capital investment decisions and to better understand hidden costs or untapped assets. Emissions caps establish scarcity of atmospheric space in which to release emissions, and that scarcity signals value. The value rises and falls in relationship to daily market factors, especially energy costs, so that cap-and-trade provides critical economic feedback on the value of energy efficiency and emissions curtailment.

Congress faces an enormous challenge in balancing regional and national needs, as it strives to address global climate change. However, the U.S. is a pioneer in market-based solutions to environmental problems that provide exactly the kind of flexibility that is needed. Cap-and-trade is a rigorous tool that we have at our disposal. The time is ripe for the U.S. to benefit from its existing experience and help lead the world to tackle the most pressing environmental problem of our generation.

Richard L. Sandor, Ph.D., is chairman and founder of the Chicago Climate Exchange and has been named by Time magazine a “Hero for the Planet.—

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