A Big Loophole in Cap and Trade

How companies may be rewarded under the cap-and-trade system for green projects they already had in the works

Sierra Pacific CFO Emmerson says offsets fit well with "intensive forest management" Peter Dasilva

By Ben Elgin

Nearly 3,000 miles from the U.S. Capitol, where lawmakers are debating landmark climate legislation, a crucial aspect of the national campaign to limit greenhouse gas emissions is taking shape at the headquarters of Sierra Pacific Industries.

Situated on the banks of the Sacramento River, Sierra Pacific is California's largest nongovernment landowner and timber harvester. The privately held company, which has estimated annual revenues of $1 billion, says it will manage trees on 60,000 acres of its land in a way that will soak up more carbon dioxide and slow global warming. In exchange, it could receive about $10 million over five years via the sale of "carbon offsets"—financial instruments that would play a vital role in the proposed "cap-and-trade" system at the core of pending climate legislation.

The buyers of Sierra Pacific's offsets—manufacturers, power companies, and other sources of greenhouse gases—would be allowed to continue some of their emissions on the theory that the pollution will be balanced out by the preservation of Sierra Pacific's CO₂-consuming trees. This is one way cap and trade is supposed to encourage environmentalism without unduly inhibiting industry. The term refers to the strategy of setting an overall limit on emissions and allowing companies to use market trading to meet the cap.

"The carbon model fits very well with intensive forest management," says Mark Emmerson, Sierra Pacific's CFO, during an interview in a company conference room adorned with blond Douglas fir paneling. "Every year, we end up with more trees in the ground than we began with."

QUESTIONABLE VALUE

But there's a hitch: Long before considering the offset plan, Sierra Pacific had already agreed to grow more trees. In other words, the offsets may not result in any new conservation. The forestry giant could reap a windfall while industry continues to pollute.

Sierra Pacific's plans illustrate a potential weakness in the cap-and-trade approach, one that has already cropped up in Europe, where the strategy has been used for several years: If offsets are not policed stringently, they will do little to curb global warming.

In June the House of Representatives narrowly approved a bill that aims to cut heat-trapping emissions 17% by 2020 from 2005 levels. Several Senate committees are working on similar legislation; all of the versions encourage use of offsets from such U.S.-based projects as those that replant forests or capture methane from dairy farms. If a final bill emerges, President Barack Obama is expected to sign it.

Purchasing offsets that represent someone else's commitment to reduce emissions is generally much less expensive than renovating a factory to make it green-friendly. But there is a drastic shortage of projects in the U.S. that would generate offsets. And regulators may feel pressure to weaken rules to allow more offsets into the system.

California, a trailblazer on climate rules, enacted its own global warming law in 2006. It seeks to reduce greenhouse gas emissions to 1990 levels by 2020. How California fares could foreshadow the fate of any national cap-and-trade system.

LESS THAN ADVERTISED

After deliberating for two years, the state adopted the latest rules for forest offsets in September. "Our purpose is to make sure there is environmental integrity," Gary Gero, president of Climate Action Reserve, a Los Angeles nonprofit charged with creating the rules, told a luncheon of state legislative staff members in Sacramento in October. "If someone says they've reduced 1 ton of greenhouse gas emissions, there [should be] legitimacy to that claim."

The program has already sparked the sale of offsets in anticipation of its 2012 start. "The protocols work with our business," says Neal Ewald, vice-president and general manager for California operations at timber company Green Diamond Resource.

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