This is from a business journal so the angle isn’t one Rising Tide North America support – we reject Carbon Trading outright as a major distraction from efforts to make the world a more sustainable, equitable place. See www.carbontradewatch.org for more information on Carbon Trading.
Is water the new carbon? by Matt Jenkins
Four years ago, the Chicago Climate Exchange was created as a way for companies to buy “carbon credits” to offset their greenhouse gas emissions. The market broke new ground by providing industries with a way to reduce their total emissions – either directly or indirectly – at the lowest possible cost. Today, carbon trading and is estimated to be a nearly $790 billion marketplace with individual, corporate and government participants. Now at least one member of the Chicago Climate Exchange sees a similar future in solving a more immediate environmental challenge: water pollution and shortages.
“When I got involved in carbon offset development, it became obvious that water was potentially a bigger market than even carbon,” says John Regan. Regan founded the Environmental Credit Corp., a carbon-credit supplier on the Chicago Climate Exchange; he is also the chairman of Biofinancial Corp., a Santa Cruz, Calif.-based family of hedge funds. “Carbon reduction is a relatively slow evolution,” Regan says. “It takes 25 to 50 years before you see the impact of what you do today. If you don’t solve the water impacts in five years, you’ll have a crisis on your hands.”
The idea runs roughly like this: Under a capand- trade system, water polluters have the option to reduce pollution in their own operations, or to purchase pollution-control credits from another source at a lower cost than if they undertook the pollution control themselves. In theory, a cap-andtrade system would achieve the same overall water-quality improvement at a lower overall cost.
And such programs don’t have to be limited to water-quality problems, either. Industries, farmers or cities could also conceivably buy and sell credits for water use, driving down the cost of water conservation and efficiency programs. But entrepreneurs like Regan are faced with the challenge of creating a market for water credits out of thin air. Traditionally, environmental trading systems are thought to work best (and sometimes only) when there is a regulatory “stick” driving exchanges. Currently, the Environmental Protection Agency has set total maximum daily load requirements for certain pollutants in water, but there is no broad, national cap-and-trade program for either water pollution or water use.
Embryonic local markets are emerging, however. Some small-scale water-quality credit trading programs – mainly to meet EPA waterquality requirements for phosphorus, nitrogen and heavy metals – already exist in at least 17 states and are being considered in four more. In the area around the Chesapeake Bay, for example six states and the District of Columbia are participating in a nutrient-trading program to reduce nitrogen and phosphorous loads that have caused a “dead zone” in the bay.
Regan is quick to point out that carbon trading has become popular despite the fact that the practice is still essentially a regional activity, led by the multi-state Regional Greenhouse Gas Initiative cap-and-trade program in the Northeast and the more recent Western Regional Climate Action Initiative. Even participation in the Chicago Climate Exchange, which now counts companies such as Intel, Ford and Cargill among its members, is still strictly voluntary (although many participating companies say they are trying to stay ahead of what they believe will be an inevitable cap on greenhouse gas emissions in the United States, along the lines of the Kyoto Protocol).
Regan says the shifting landscape of corporate accountability may also spur the development of water-credit trading. In particular, the 2002 Public Company Accounting Reform and Investor Protection Act, better known as the Sarbanes-Oxley Act, strengthened requirements that companies accurately report their environmental liabilities.
And just as companies and individuals are now seeking ways to become “carbon neutral,” a similar shift is happening with water. One of the most visible efforts has come from the Coca-Cola Co. (NYSE: KO), which uses 77 billion gallons of water a year. Greg Koch, Coca-Cola’s Director of Global Water Stewardship, says, “Water, for us, is unique, in that it is our business: It’s a substantial portion of all of our products.” (A 2005 editorial in The Economist put a finer point on the issue, noting that “while BP may yet see life Beyond Petroleum, Coca-Cola will never get Beyond Water.”)
Coke has weathered a recent storm of criticism for groundwater depletion caused by its bottling plants-most notably in India-and several U.S. universities have boycotted Coke products as a result. The company says over the past five years, it has reduced the amount of water it uses by 5.6 percent, even as its sales volume has increased 14.6 percent. But in June, Coke made a far more ambitious pledge when it partnered with the World Wildlife Foundation and announced its commitment to going “water neutral.” In a statement, Coke chairman and CEO E. Neville Isdell said, “Our goal is to replace every drop of water we use in our beverages and their production.”
Coke’s initiative has three prongs: reducing the amount of water it uses to produce its drinks; treating and reusing, or recycling, water in its production processes; and replenishing water for both human and environmental needs. Koch offers the example of a company-sponsored project in Kenya that is drilling wells to provide water for local villages: “You’re helping balance this water in our product with a water need elsewhere.” “It’s a classic Ã¢â‚¬Ëœwe get it.’ The light bulbs have gone off,” says John Regan. “Lack of water is the greatest single liability to a company like Coke. If they run out of water, they’re out of business.”
Koch says Coke hasn’t actively contemplated participating in any kind of water-credit trading program, but for Regan, the company’s move is an encouraging sign of the nascent need for a water-credit trading scheme. Some significant hurdles, however, still lie ahead. A “trading platform” for water, similar to the Chicago Climate Exchange, doesn’t yet exist – although Exchange founder Richard Sandor has been contemplating such an innovation for several years. And water comes with its own challenges – some of which Coca-Cola is now working through as it tries to implement its water-neutral policy.
As Koch points out, “there’s no Kyoto Protocol” for water – and, lacking one, there’s little in the way of the necessary incentive to drive a market. Additionally, one of the enduring criticisms of cap-and-trade programs is that, while they may reduce overall loads of, say, pollutants, they often do so by reducing impacts in one location while allowing historic – or even increased – levels of pollution to continue in another. Because water pollution and water shortages are usually specific to individual river or groundwater basins, or “watersheds,” offsets are not practically transferable worldwide.
“Unlike carbon, water is uniquely local,” Koch says. “If you shut your lights off in your office, less energy has to be produced, hence less carbon emissions, hence somebody in Bangladesh benefits. If you shut the water off when you’re brushing your teeth, it only has an impact in the area right around you.”
Still, watersheds can be big enough to create a market with large numbers of participants. Take, for instance, the case of the Ogallala Aquifer, the massive groundwater basin that lies beneath eight High Plains states [see “Water, water everywhere, SI, Jan. 2007]. Farmers on some 16 million acres pump water out of the aquifer to grow about 40 percent of the U.S. grain harvest – exploiting the water on such a massive scale that the water level in the aquifer has plunged precipitously over the past several decades.
Ironically, efforts to reduce greenhouse gas emissions may be making the Ogallala’s situation worse: Rising demand for ethanol is spurring farmers to use even more of the Ogallala’s water for their crops. “Our national policy on biofuels is enhancing that aquifer depletion,” Regan says. “Biofuels are a massive consumer of water, and biofuel producers should be replenishing that.”
Regan is now scouting for ways to begin creating credits that could be bought and sold on a market similar to the Chicago Climate Exchange. “If there’s 21 states looking to develop this in one form or another, it’s pretty clear that there’s an opportunity,” Regan says. “What’s missing is a resource to create offset credit projects on a large scale where we can actually go into a watershed, create an offset credit and provide a resource for those who need to acquire it in industry, whether it’s a municipal water user, agriculture or an industrial polluter.” Regan brings considerable experience from creating carbon-offset credits to his new project.
Environmental Credit Corp., which he helped found, installs covers over dairy farmers’ sewage lagoons to trap methane and other greenhouse gases generated by cow manure; the company has also helped landfills receive credits for methane that they capture. In the case of water, a company like Biofinancial Corp. could help farmers convert to more efficient irrigation systems, generating credits they could then sell to an ethanol producer.
Regan acknowledges that adapting the carbon-trading model to water is fraught with its own challenges. But “when you have a problem as critical to our future survival as this, as the crisis materializes, a market will emerge. It’s very similar to carbon: Who knew anything about carbon trading in 2000? Today, it’s the fastest-growing market on the planet.”