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Carbon Legislation Debated at San Diego Conference posted on May 4, 2009

As the saying goes, “Flat is the new up.” In April 2009, this message echoed loud and clear at the “Navigating the American Carbon World” conference in San Diego where attendance numbers of 850 delegates matched the prior year turnout almost exactly.

By Lee Barken, CPA, CISSP, CISA, CCNA, MCP
IT Practice Leader, Haskell & White, LLP

In his welcoming comments, conference organizer Gary Gero, President of the Climate Action Reserve thanked the audience for attending despite a harsh economic climate. “In this era of constrained travel budgets, it’s encouraging to see such a strong interest in this conference and the carbon markets in general.”

Indeed, all eyes are focused on the promise and pitfalls offered by the looming carbon market. In California, sweeping legislation known as the “Global Warming Solutions Act”, or AB32 for short, has the potential to rethink the way we look at carbon emissions from both a social and economic perspective. This bill aims to reduce emissions of green house gasses (GHGs), such as carbon dioxide (CO2) to 1990 levels by the year 2020.

To achieve this goal, AB32 establishes a “cap and trade” allowance system where large emitters will have limits placed on the levels of GHGs they can discharge. To comply, it requires them to purchase excess emission permits or “carbon credits” in an open marketplace. In short, cap and trade puts a price on carbon emissions, thereby providing a pricing signal to the marketplace for their pollution and abatement efforts.

In addition to purchasing allowances in an auction, companies may also have the ability to purchase “carbon offsets”, which are verified emissions reductions that can be traded between companies. For example, entities that engage in carbon reducing activities (such as planting forests, capturing methane from landfills, etc), can sell their “credits” to other companies.

The underlying theory behind offsets is that a reduction provides the same benefit to the planet regardless of what location (or country) the reduction takes place in. In other words, emitting 100 tons in one place and reducing 100 tons in another place is a net wash from a global perspective.

A National Program for Cap and Trade?
Purely by co-incidence, just one day before the conference began, a watershed moment occurred back in Washington D.C. Details of the 648-page discussion draft “American Clean Energy and Security Act of 2009” were released. This bill, authored by congressmen Henry Waxmax (D., CA) and Edward Markey (D., MA) offers the first hint at federal legislation which would lay the groundwork for a national cap and trade system. If passed, this legislation would supersede several regional efforts. Those efforts would in turn phase out and migrate into the national framework.

According to a report by research firm PointCarbon, the projected level of reductions needed to meet the cap would be 205 million tons of carbon dioxide (CO2) in 2012. By the year 2020, the US would need to reduce emissions by an even more ambitious 1.4 billion tons of CO2. Of course, the link between carbon emissions and economic growth can’t be ignored. According to Emilie Mazzacurati, Manager for Carbon Market Research North America, “Actual emissions are likely to be lower due to recently passed policies and the impact of the economic recession.”

Climate Change, Obama and You
As the regulatory process evolves through both statewide efforts (AB32) and national policies (Waxman-Markey), it is clear that the political winds have shifted in favor of more aggressive climate change policies. Despite the US failure to ratify the Kyoto protocol under the Bush administration, numerous state and regional efforts have begun implementing their own versions of cap and trade. Although these frameworks may eventually be superseded, the rulemaking efforts (where the rubber meets the road) will certainly serve to inform and guide the upcoming federal legislation.

Ultimately, what does the mean for you? At this stage, the future remains unclear. It is likely that pricing carbon will result in new winners and losers as industries adjust to new pricing signals. Legacy industries will struggle to adapt their business models to a higher cost structure. Innovators will emerge and entire industries will be incentivized to develop novel solutions and technologies. The final cost to the consumer in dollar terms is not fully known. However, the benefit of maintaining a planet that supports human life is, well, priceless.