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strategy and business
 / Summer 2008 / Issue 51(originally published by Booz & Company)


The Making of a Market-Minded Environmentalist

Markets and Global Warming
In 1992, at the Rio Earth Summit, we proposed applying this strategy to carbon emissions. But our proposal was roundly rejected; instead, the delegates decided that each nation would make its own plan to get back to 1990 levels by the year 2000. Our group knew this would be futile. We’d seen the Clean Water Act prescribe zero discharge into the nation’s waterways and instruct every state and county to devise a plan. And it hadn’t worked.

Soon after Rio, a philosophical war began within the Clinton administration: Would they champion the old command-and-control approach in the next international negotiations in Buenos Aires and then in Kyoto? Would they propose a carbon tax? Or would they advocate cap and trade? It was a knockdown, bloody fight, in which the Environmental De­fense Fund was closely involved as one of the advising groups. We must have written a hundred memos and had as many meetings before our view prevailed. We worked with Larry Summers at the Treasury Department; John Podesta, President Clinton’s chief of staff; Katy McGinty, who ran the White House Council on Environmental Quality; Hazel O’Leary at the Department of Energy; and Under Secretary of State Tim Wirth. And, finally, Clinton decided that cap and trade was consistent with his own “third way” political philosophy.

Thus we helped write the American proposal for the 1997 United Nations Framework Convention on Climate Change in Kyoto, Japan. The cap and trade proposal was central to the grand bargain that the U.S. forced the rest of the world to accept in return for its agreement with the Kyoto Protocol reductions. The Europeans were quite opposed at first: They wanted “policies and measures” (which is their phrase for “command and control”). The tension between our organization and the European environmental groups was substantial. But although Kyoto was flawed in significant respects — requiring no emission reductions from developing countries and not dealing with forests in a sensible way — we ultimately found common cause in the need for mandatory reductions and real enforcement. The great irony, of course, is that after the United States demanded cap and trade, President George W. Bush turned his back on Kyoto, leaving the Europeans with the American mechanism but no American participation.

The Europeans went ahead anyway, starting their trading system in 2005 to prepare for Kyoto’s 2008 start. The initial experience was mixed: Permits were over-allocated on the basis of industry’s self-reported emissions. Even so, money is beginning to move toward solutions. In September 2006, at a meeting of the Clinton Global Initiative (an international forum of leaders), I heard venture capitalist John Doerr, a partner at Kleiner Perkins Caufield & Byers, describe innovations he was seeing emerge in response to the new carbon market. Though the European pilot program was just starting up, the signal was being sent and people in the real world were beginning to act in response. I had believed in this approach for a decade and had seen how well it worked for acid rain, but the sense of possibility was now so strong that I decided to write my book, Earth: The Sequel. I saw the power in sharing stories of the kinds of pioneers who will remake our energy infrastructure and, in the process, become billionaires.

A cap and trade system, of course, isn’t based purely on free markets or voluntary action. It requires mandatory cuts in pollution and a government-created market. And markets are not an appropriate solution for every environmental problem. For particularly toxic substances such as mercury, which concentrate close to where they are dispersed into the environment, you need prohibitions, pe­riod. But for substances like carbon dioxide that don’t have local effects, can’t be banned, and are harmful in quan­tity, creative solutions must be found to ensure that human aspirations and human needs are met. And you need to have mechanisms that drive costs down.

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