Support Grows for Caps On CO2 Emissions;

Big Oil Battles Detroit

By JEFFREY BALL

The global-warming debate is shifting from science to economics.

For years, the fight over the Earth's rising temperature has been

mostly over what's causing it: fossil-fuel emissions or natural

factors beyond man's control. Now, some of the country's biggest

industrial companies are acknowledging that fossil fuels are a major

culprit whose emissions should be cut significantly over time.

A growing number of these companies are pushing for a mandatory

emissions limit, or "cap." Some see a lucrative new market in

clean-energy technologies. Many figure a regulation is politically

inevitable and they want to be in the room when it's negotiated, to

minimize the burden that falls on them.

The broadening, if incomplete, consensus that fossil fuels are at

least a big part of the global-warming problem signals real change in

the environmental debate. The biggest question going forward no

longer is whether fossil-fuel emissions should be curbed. It's who

will foot the bill for the cleanup -- and that battle is heating up.

Yesterday, 10 companies, including industrial giants that make

everything from bulldozers to chemicals to electricity, joined

environmental groups in calling for a federal law to "slow, stop and

reverse the growth" of global-warming emissions "over the shortest

period of time reasonably achievable." Tonight, President Bush, whose

administration has rejected such caps as economically unacceptable,

will deliver a State of the Union address in which he's expected to

announce a bigger push for such things as low-emission alternative

fuels.

In the center of the regulatory cross hairs are utilities. They're

the world's biggest emitters of carbon dioxide, the global-warming

gas that's produced whenever fossil fuels are burned. Written one

way, a cap would help utilities in the Southeast or the Midwest,

which burn lots of coal, a particularly carbon-intensive fuel.

Written another way, a rule would help utilities on the West Coast,

the Northeast and the Gulf Coast. They use mainly natural gas, which

produces lower CO2 emissions than coal, and nuclear energy, which

produces essentially no CO2.

Auto makers and oil producers also are worried about a potential cap,

and they're lashing out at each other. The Big Three auto companies

are making speeches and running advertisements calling on Big Oil to

crank out more low-carbon alternative fuels such as corn-based

ethanol. Big Oil, in its own speeches and ads, says the auto makers

should build more-efficient cars.

Lobbying on the issue is ramping up. The American Iron and Steel

Institute, which opposes any emission cap, this month assigned an

executive who had been working broadly on environmental issues to

focus specifically on global warming. Some companies that oppose a

cap argue it would raise their costs and hurt their competitiveness

against rivals in developing countries such as China, where no cap

exists.

DuPont Co., the chemical giant, heartily endorses a cap in part

because it figures it would help boost demand for energy-efficiency

products the company makes.

Entergy Corp., a utility that's also pushing for a cap, had a

lobbyist in the room last week when Sen. Dianne Feinstein, a

California Democrat, announced a carbon-cap bill. Entergy would

likely benefit from her measure because the company's fuel mix

includes a lot of low-carbon fuels.

"It was a hand-holding, kumbaya moment," says Brent Dorsey, Entergy's

director of corporate environmental programs. "Every company is going

to be playing to their own strengths and weaknesses" in the

regulatory battle that's breaking out over global warming, he adds.

Among scientists, a broadening consensus has developed that

fossil-fuel emissions are contributing to global warming; the debate

has been over whether they're the main cause. In 2001, the

Intergovernmental Panel on Climate Change, a United Nations body that

periodically assesses climate science, cited "new and stronger

evidence that most of the warming observed over the last 50 years is

attributable to human activities." In 2005, representatives of

scientific societies from 11 countries, including the U.S., called

the science "sufficiently clear to justify nations taking prompt

action."

Still, uncertainties remain. Among them, the U.N. panel noted in its

2001 report, is the extent to which "natural factors" unrelated to

human activity play a role in the rising temperatures. The U.N. panel

is set to release its next climate-science report Feb. 2.

Fossil fuels provided 80% of global energy in 2004, and they're on

track to provide 81% in 2030, according to the International Energy

Agency, a Paris-based energy watchdog for Western industrialized

countries.

Significantly curbing their emissions would require sweeping

technological change, from more-efficient power plants and cars to

the potential injection and burial of massive amounts of CO2

underground.

CALL FOR CAPS

Ten U.S. companies and four environmental groups, joined as the U.S.

Climate Action Partnership, called Monday for the U.S. to impose a

mandatory cap on global-warming emissions. They recommended Congress

establish a long-term "target zone" of reducing emissions between 60%

and 80% below today's levels by 2050. In addition, they suggested a

series of shorter-term targets:

• Keeping emissions to 100% to 105% of today's levels within five

years of "rapid enactment."

• Reducing emissions to 90% to 100% of today's levels within 10 years

of enactment

• Reducing emissions to 70% to 90% of today's levels within 15 years

of enactment

Read the full recommendations on <http://www.us-cap.org/>the group's Web site2.

INTERESTED PARTIES

In April, more than two dozen companies and interested groups

submitted to a Senate committee their recommendations regarding a

potential emissions cap.

<http://energy.senate.gov/public/_files/ExecutiveSummariesforwebsite0.pdf>Review

the executive summaries3 of their presentations and see full details

at

<http://energy.senate.gov/public/_files/ExecutiveSummariesforwebsite0.pdf>the

Senate's Web site for the conference4.

Another possibility would be to reduce the rate of growth in

fossil-fuel consumption by supplementing the fuel mix with

alternatives, from nuclear power to crops to the wind and the sun.

Outside the U.S., many countries already have modest experience in

emissions caps, thanks to the Kyoto Protocol. The treaty, which

hasn't been ratified by the U.S., requires ratifying nations

collectively to cut their emissions 5% below 1990 levels by 2012.

Several Northeast states and California already have announced plans

to impose emission caps of their own. And a handful of proposed

federal caps are under consideration in Congress. The least stringent

is one from senators led by Jeff Bingaman, a New Mexico Democrat. By

2030, it would raise gasoline prices 12 cents per gallon, according

to a study issued this month by the U.S. Energy Information

Administration, and slow the rate at which U.S. coal consumption

increases.

The federal proposals differ in the structural details of the "cap

and trade" system they would set up to regulate CO2 emissions. Under

such a system, the government would set a ceiling on how much CO2 the

U.S. economy -- or whichever sectors lawmakers pick -- could emit

each year. It would ink a corresponding number of pollution permits,

each entitling the bearer to emit one ton of the gas.

Then, based on complex allocation rules it devises, the government

would divide up the permits among companies. Those companies could

buy and sell permits among themselves on a greenhouse-gas market like

a Kyoto-related one already under way outside the U.S. Companies that

decide it's too expensive to cut their own emissions enough to comply

with their government cap would go to the market and buy extra

emission permits from companies that ended up with more than they

needed. The theory behind the market is to create an economy of scale

that reduces everyone's cost.

Other regulatory structures are possible, including a straight tax on

CO2 emissions. Politically, a cap-and-trade system is more popular

than a tax. Environmentalists like the severity of an absolute

ceiling on the amount of CO2 companies can emit. Industry likes the

flexibility of a market in which permits to pollute can be bought and

sold.

And cap-and-trade systems already are in use. The U.S. has had one

for more than a decade to curb the pollution that causes acid rain, a

regulation widely viewed as successful.

Still, Steven Rowlan, director of environmental affairs for Nucor

Corp., one of the biggest U.S. steelmakers, warns U.S. industry is in

for a shock if Washington follows Europe and imposes a global-warming

cap. The U.S. steel industry already has gotten more energy-efficient

in recent years, he says, so it would be unfair to require it to make

further emission cuts while its competitors in the developing world,

where emissions are rising fastest, remain free from a cap. The

steelmaking process itself emits large amounts of CO2.

A smarter tactic, he says, would be for the U.S. to slap trade

restrictions on developing-world steelmakers requiring them to meet

minimum environmental standards as a condition for exporting their

products to the U.S.

"The biggest hammer that the United States has is its market," Mr.

Rowlan says. "And that, more than anything we do domestically, will

have the greatest impact on greenhouse gases." Nucor, based in

Charlotte, N.C., is considering running ads to drive this point home.

DuPont, on the other hand, is actively promoting an emissions cap. It

thinks a cap would help its business. DuPont makes materials used in

such devices as solar cells, wind turbines, fuel cells, and

lightweight automobiles -- all of which are likely to be in higher

demand in an economy in which CO2 emissions carry a cost.

"We think there is a lot of market opportunity," says Linda Fisher, a

former U.S. Environmental Protection Agency official who's now

DuPont's chief sustainability officer.

But DuPont, based in Wilmington, Del., doesn't want just any cap. For

one thing, it wants a cap that covers all sectors of the economy --

not one that's limited to utilities, as are some proposals pending in

Washington. The more industries covered by a cap, the more potential

customers for DuPont's environmental products.

DuPont also wants a cap to award companies credit for past emission

cuts they've made. DuPont already has invested to significantly cut

its emissions.

Utilities, for their part, are split on whether they want a cap --

and, if so, what kind. Where a utility stands on this issue depends

largely on where in the country it sits.

Duke Energy Corp., based in Charlotte, is the country's third-largest

burner of coal, though it also has significant nuclear assets. It's

pushing for permits to be distributed based on the amount of CO2 a

utility has emitted in the past -- a system that would protect big

coal burners such as itself.

James Rogers, Duke's chairman and chief executive, notes that Duke

already is assuming in its investment decisions that it will have to

pay for carbon emissions. So it has begun investing in new plants

that will burn coal more cleanly than today's plants do. He argues

any cap should ensure adequate permits to utilities making such

investments. "It's going to take several decades to bring this on,"

he says of the technology. "We shouldn't have an economic scheme that

puts an undue economic burden on regions of the country that are

reliant on coal."

Given Duke's coal reliance, it might seem strange that Mr. Rogers has

emerged in recent years as perhaps the U.S. utility industry's most

outspoken proponent of a global-warming constraint. His position is a

bit "awkward," he notes, because he also serves as chairman of the

Edison Electric Institute, the electric industry's Washington trade

group, which opposes any mandatory global-warming cap. He's set to

speak on three panels discussing global warming this week at the

World Economic Forum in Davos, Switzerland.

Mr. Rogers, wearing his Duke hat, says he's just being realistic. He

has concluded a cap is coming -- and that his shareholders are likely

to do better if he can influence the details. "If you're not at the

table when these negotiations are going on, you're going to be on the

menu," he says. "This is about being at the table."

Fighting Duke and other coal-burners are utilities such as Entergy.

Based in New Orleans, it uses a lot of natural gas and nuclear fuel.

Unlike Duke, Entergy wants permits to be distributed based on a

utility's total electricity output -- a system likely to give

low-carbon generators such as itself excess permits they could sell.

Duke's Mr. Rogers says that would amount to a "windfall" for

low-carbon utilities. "Even though they don't need allowances, they

would get them, just because," he says.

Entergy's Mr. Dorsey says his company isn't asking for a windfall.

The permits Entergy would get amount to "a revenue stream that we

will need to build a new nuclear plant," he says. Still, he allows,

"because of our natural gas and nuclear, we will fare better than

most" under a carbon cap.

Auto companies also are jockeying to shape a potential carbon

constraint to their advantage. They've been playing this sort of

regulatory game for years.

They already face a kind of carbon limit in the federal government's

longstanding fuel-economy standards for cars and trucks, because

vehicles that burn less gasoline emit less CO2. Those rules give auto

makers extra credit for building versions of their conventional

vehicles they've modified to run on either gasoline or ethanol. Very

few of those vehicles actually wind up running on anything but

gasoline. But the credits let the auto makers build more thirsty

sport-utility vehicles and pickup trucks -- the industry's bread and

butter, particularly when oil was cheaper.

Auto officials who declined to be named said the industry probably

will accept some toughening of the fuel-economy standards. But in

return, it may seek bigger credits for selling vehicles that burn

less oil, including those that can run on ethanol.

At the same time, auto makers want to ensure other industries get

hit. In a speech last week in Detroit, Rick Wagoner, General Motors

Corp.'s chairman and chief executive, said his company plans to build

more ethanol-capable and electric-powered vehicles. But he also

stressed "important roles for other industries, like oil and electric

utilities, to name a few." He called for more tax credits and

subsidies for alternative fuels.

The oil industry itself is mobilizing -- including Exxon Mobil Corp.,

the Irving, Texas, oil giant that in the past has been outspoken in

its questioning of global-warming theories. Scientific questions

remain, says Kenneth Cohen, Exxon's vice president for public

affairs, but "we know enough now -- or society knows enough now --

that the risk is serious and action should be taken." Exxon isn't

calling for an emission constraint, but it's starting to talk about

how it wants one structured if one is imposed.

In November, Rex Tillerson, Exxon's chairman and chief executive,

called in a speech for "steps now to reduce emissions in effective

and meaningful ways." Then he listed two: boosting automotive fuel

economy and cutting emissions from coal-fired power plants.

Write to Jeffrey Ball at jeffrey.ball@wsj.com5

URL for this article:

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Hyperlinks in this Article:

(1)

<http://www.eia.doe.gov/oiaf/servicerpt/bllmss/pdf/sroiaf%282007%2901.pdf>http://www.eia.doe.gov/oiaf/servicerpt/bllmss/pdf/sroiaf(2007)01.pdf

(2) <http://www.us-cap.org/>http://www.us-cap.org/

(3)

<http://energy.senate.gov/public/_files/ExecutiveSummariesforwebsite0.pdf>http://energy.senate.gov/public/_files/ExecutiveSummariesforwebsite0.pdf

(4)

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(5) mailto:jeffrey.ball@wsj.com

Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved

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