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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

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."