Natural gas

Coal

Other

PRIMARY FUEL TYPE

CARBON EMISSIONS 2004, in tons

Starting in 2009, regional emissions will be kept stable. In 2015, reductions will kick in.

Beyond the Cap: OffsetsUp to half of the program’s carbon reductions may come from offsets, which swap emissions at the power plant for projects that reduce greenhouse gases elsewhere. Critics of offsets say that in the popular push to use offsets to be “carbon neutral,” many proposed projects do not create real reductions. Designers of the program offered only five ways that power plants can count offsets as carbon credits, and they have spelled out the requirements in great detail. Several dozen proposals for offset projects have been submitted so far.

The Cap on CarbonUnder a new, mandatory cap-and-trade program, 188 million carbon credits will be issued to the 10 participating Northeastern states. Each credit represents one ton of carbon emissions. The states will auction a portion or all of the credits to their 230 power plants with at least 25-megawatt capacities. A plant may emit only as much carbon as it has credits to cover within a three-year compliance period, or risk high penalties. Because credits are limited, the auction and trading of credits will establish their price.

Capturing landfill gas Reducing SF6 leaks Planting forests Managing manure Making buildings energy-efficient

Sulfur hexafluoride has a global warming potential of 22,200, the highest of all greenhouse gases.

Methane’s global-warming potential is rated 23, meaning that one ton has the same effect as 23 tons of carbon dioxide.

SF6 is an insulator for circuit breakers and other equipment in power plants. Leaking seals and joints can be fixed, and the gas needs to be contained while equipment is installed or serviced.

Trees take carbon dioxide out of the air during photosynthesis.

New forests must be planted with local species. The land must be preserved so that there is no danger that the the trees will be cut down decades later.

Livestock waste, on farms where manure is stored in pits or lagoons, is a large source of methane emissions.

Methane from animal manure can be captured and burned to produce electricity and heat.

Energy consumption in many buildings can be cut by 40 percent.

Owners can improve heating and cooling systems, upgrade hot water systems and switch to high-efficiency lights.

In a settlement with New York State in 2005, operators of six coal plants agreed to greatly reduce emissions that cause smog and acid rain.

Vermont has a nuclear plant and imports most of its energy, so it has almost no emissions.

Maryland, with 37 million tons of carbon from 16 plants, was the most recent state to join, on April 20.

CLIMATE IMPACT

HOW TO ACHIEVE IT

Landfill gas can be collected from vertical wells in the landfill and then burned, which converts the methane to carbon dioxide, greatly reducing its greenhouse-gas potency.

A 900-megawatt natural gas plant might need two million credits

A 900-megawatt coal plant might need six million credits

Companies can buy, sell

and trade credits after the auction

Banks or other parties can buy credits if the auctions are open

Sources: Regional Greenhouse Gas Initiative; World Resources Institute; Natural Resources Defense Council; M. J. Bradley & Associates Hannah Fairfield/The New York Times; illustrations by Al Granberg

188,076,976 carbon credits will be sold in the first year

Banks hope to profit by selling their credits at a

higher price.

50

100

150

200 million

’09 ’13 ’17 ’21

MANDATORY CAP

Projected emissions tons of carbon

BUSINESS AS USUAL

New York City’s total power

plants:11.2 million

tons

Long Island’s total power

plants:9.3 million

tons

Compliance periods are three years.

Pennsylvania and Washington, D.C., are observers.

5 million

2 million

The AuctionAnd TradeInstead of giving carbon credits directly to the companies, states will auction a portion or all of the credits. Details about whether the auctions will be open to any bidders, and how to protect the market from manipulation, are being worked out.

=100,000 credits

Makes lotsof dollars.

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6 BU N THE NEW YORK TIMES, SUNDAY, MAY 6, 2007

By HANNAH FAIRFIELD

AMID steadily increasing carbonemissions, and a federal gov-ernment hesitant to take the

lead on climate legislation, 10 stateshave joined to create the first man-datory carbon cap-and-trade pro-gram in the United States. They aimto reduce emissions from powerplants by 10 percent in 10 years.

Leaders of state environmentaland energy regulatory agencieshammered out the detailed model forthe program, the Regional Green-house Gas Initiative, over the courseof three years. The program sets acap on the total amount of carbonthat the 10 states — as a whole — canemit. Starting in 2009, each state willreceive a set amount of carbon cred-its for its power plants, and eachplant must have enough allowancesto cover its total emissions at the endof three-year compliance periods.

In 2003, George E. Pataki, thenNew York’s governor, invited gover-nors of 10 other states from Maine toMaryland to discuss a program tocut power plant emissions. All butone of the states joined the program;Pennsylvania has observer status.

Officials have closely watched theEuropean Union, which started itscarbon trading market in 2005; ana-lysts say the Europeans have stum-bled on some fronts. “We’ve learneda lot from the Europeans,” said Ju-dith Enck, adviser on environmentissues to Gov. Eliot Spitzer of NewYork. “The way we distribute the al-lowances will be vastly differentthan the European experience.”

To build a carbon market, its origi-nators must create a currency ofcarbon credits that participants cantrade. In Europe, power companiesreceived these credits directly andcould buy or sell from one another asneeded. But most companies passedthe cost of the credits on to consum-ers even though they received themfree — giving the companies windfallprofits. Power companies in Britainalone made about $1 billion from freecredits in 2005, according to a studyby the British government.

Participants in the United Stateswant to avoid that problem by sellingsome or all of the credits at auction,with the proceeds going to state ener-gy efficiency programs.

In Europe, power companies werenot the only businesses to profit fromthe new carbon market. Becausepower plants there can use creditsearned from offset projects that takegreenhouse gases out of the atmos-phere (or put less of them into it),businesses wanting to earn offsetcredits inundated the Europeanswith proposals — many of whichwould have a negligible effect onemissions or were for reductionsthat would have taken place anyway.

To sidestep that problem, the pro-gram here limits offsets to five cate-gories: capture of landfill gas, curbson sulfur hexafluoride leaks, plant-ing of trees, reductions in methanefrom manure, and increased energyefficiency in buildings. Power com-panies can offset 3.3 percent of aplant’s total emissions from anycombination of the five categories.

“We saw what happened in Eu-rope, so we limited the categoriesand set our criteria upfront,” saidChristopher Sherry, chairman of theregional program’s staff workinggroup and a research scientist at theNew Jersey Department of Environ-mental Protection. “We did that sowe would have assurance that the re-ductions actually take place.”

Although Northeastern stateshave taken the lead in inaugurating amandatory carbon market, Califor-nia and some of its neighbors are notfar behind. Those states are watch-ing closely; Mr. Sherry and othersinvolved in the 10-state effort are al-ready helping California figure outhow best to accomplish its climateplan.

“The idea is to see what everyoneelse has done, and learn from it,”said Dale Bryk, a lawyer at the Natu-ral Resources Defense Council whohas been involved with the North-eastern regional program and Cali-fornia’s advisory committee. “Let’snot start from scratch.” Ø

When Carbon Is Currency

and not mandatory.” Because Wall Street firms force

arbitration on their clients, youmight expect them to fight the ideaof investor choice in litigation. ButLewis D. Lowenfels, a securities lawexpert at Tolins & Lowenfels in NewYork, said arbitration has lost someof its appeal to big firms. Punitivedamages, for instance, were longbarred in arbitration, but a 1995court decision changed that. Andwhile plaintiffs in arbitration havevirtually no limit to the claims theycan bring, in court, many of thoseclaims would not be allowed in court.

“Imaginative general counsels atthese firms might sit down and say,‘This may not be so bad,’ ” Mr.Lowenfels said.

Should Mr. Leahy and Mr. Fein-gold hold hearings on mandatory ar-bitration, they may want to call Ma-bel Strobel, 86, as a witness. Ms. Stro-bel sued Morgan Stanley, her formerbrokerage firm, in 2002 after she lost$281,729. Although she “won” hercase in 2004, her $5,000 damageaward paled next to the $10,350 shewas ordered to pay in arbitrationfees. And that was on top of the$281,729 she lost.

Hearing from the arbitrators on

the case would also be instructive.They are Paul J. Sipe, founder of twoSan Diego banks; Robert B. Han-sohm, a former Los Angeles PoliceDepartment official; and Nils S.Sandberg, an investment adviser.

In a nutshell, Ms. Strobel’s brokerpersuaded her to sell an investmentproperty and buy volatile stocks andmutual fund shares with heavy salescharges. Morgan Stanley did not dis-pute the amount of Ms. Strobel’slosses, but said she was a savvy andrisk-taking investor with a 10-yeartime horizon for her investments,even though she was 79 when sheopened her account.

After an arbitration panel foundMorgan Stanley liable for Ms. Stro-bel’s losses, Jeffrey P. Lendrum, herlawyer, filed a motion in federalcourt to vacate the ruling. Last No-vember, Roger T. Benitez, a federaldistrict court judge in California, or-dered the arbitration panel to “makea proper damage award” in the Stro-bel case. The arbitrators were “inmanifest disregard of the law withrespect to damages,” the judge con-cluded, adding that if it could, thecourt would award Ms. Strobel allthe money she lost.

Morgan Stanley moved to stay theorder and appealed it. On April 9,Judge Benitez rejected the motionand ordered the arbitrators to issuean appropriate award within 30 daysor be subject to civil contempt.

Last Monday, the panelists de-clined to follow the judge’s order. Ina letter to the NASD, Mr. Sipe, thepanel’s chairman, said even thoughit found Morgan Stanley liable, thepanel had concluded that Ms. Stro-bel’s broker did not cause her lossesand that the investments were suit-able for her. The panel “provided afair and equitable assessment of thiscase,” Mr. Sipe wrote.

Neither Mr. Sipe nor Mr. Hansohmcould not be reached; Mr. Sandbergdid not return a call. A Morgan Stan-ley spokeswoman said: “This was afair and complete arbitration pro-cess and the ruling speaks for itself.”

Mr. Lendrum, Ms. Strobel’s law-yer, said he would seek to hold the ar-bitrators in contempt for failing tofollow the judge’s orders. He expectsJudge Benitez to rule soon. “When wereach a point where arbitrators be-lieve that they are not bound by thelaw, or worse yet by judicial orders,the mandatory arbitration that cus-tomers unknowingly agree to whenopening a new brokerage accountmust be abandoned,” he said.

The two senators have similarworries. “No consumer should be ob-ligated to forfeit their right to a dayin court,” Mr. Leahy said in a state-ment. “I hope the S.E.C. will takethese concerns seriously and will actto protect consumers.”

We’ll see how the S.E.C. — the in-vestor’s advocate — responds. Ø

Arbitration Continued From Page 1

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