It is important that every company consider various forms of GHG regulations, specifically the impact on the business and which forms they will be most sensitive to. This week we’ll take a look at three different and equally likely forms of GHG legislation to help your company better understand its possible exposure and risk mitigation strategies.
Performance Standards: An example of a greenhouse gas performance standard can be seen with the California Public Utilities Commission recently adopted interim Greenhouse Gas Emissions Performance Standard.
This standard was designed explicitly as an effort to help mitigate climate change. It is a facility-based emissions standard requiring that all new long-term commitments for baseload generation to serve California consumers must be power plants that have emissions no greater than a combined cycle gas turbine plant. That level is established at 1100 pounds of CO2 per megawatt-hour.
The fuel economy standards proposed by California, and rejected by the EPA, are another example of performance standards. As part of its justification in not granting California the waiver it requested, the EPA claimed that the US government was working on its own fuel efficiency standards. Performance standards are likely to be applied to any carbon intensive business. So it’s important for your company and its investors to know what aspects of your business are the most carbon intensive, and which are most prone to performance standards.
Carbon Taxes: A carbon tax is a tax on energy sources which emit carbon dioxide. It is an example of a pollution tax, which some economists favor because they tax a “bad” rather than a “good”. Currently, throughout most of North America, greenhouse gas emissions are considered an externality that is outside the scope of the basic costs of doing business. By taxing these emissions, the external cost becomes internalized and thus incentivizes reduction at the point of production. A carbon tax can be implemented by taxing the burning of fossil fuels – coal, petroleum products such as gasoline and aviation fuel, and natural gas – in proportion to their carbon content. As such, those industries that burn the most fuel are subject to the highest taxes while those whose fuel is most carbon intensive are subject to the highest tax rate per unit of output.
Unlike emissions cap-and-trade systems, a carbon tax has the benefit of being easily understood and can be popular with the public if the tax is used to fund environmental projects.
Cap and Trade: In a cap and trade system a central authority sets a limit, or cap, on the amount of greenhouse gases that can be emitted. Usually a government or international body, as is the case with the EU Emissions Trading Scheme and the UK Emissions Trading Scheme, oversees the emissions cap and program administration. In the case of the Chicago Climate Exchange (CCX), a voluntary cap and trade market has been established. It’s important to note that the CCX platform, while voluntary to join, is legally binding among members.
This cap provides companies with an incentive to pursue two basic reduction options. First, companies requiring more credits can go to the market to buy allowances or modify their technologies and processes to meet their reduction commitments or even generate their own emission reduction credits. Companies that need to increase their emissions must buy credits from those who pollute less; this is where the market gets going and the trading starts. In effect, those that can easily reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest possible cost to society.
In the event of a carbon tax or emissions trading scheme, currently profitable facilities could become costly liabilities as every new unit of carbon intensive production now has an added expense. Greenhouse gas performance standards, on the other hand, could cause whole new shifts in product portfolios for companies that have carbon heavy product lines. What’s important is that your company be aware of how each of these possible forms of legislation will affect your business and that you plan accordingly and stay aware, even participate, in the legislative debate as it takes place.