Cap and Trade Legislation: Will California’s AB32 Go National?

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Flash back to late September, 2006.

In California, the Governator has just signed Assembly Bill 32 (AB32), a Kyoto-style policy aimed at reducing greenhouse gas (GHG) emissions to 1990 levels by 2020, followed by an 80% reduction below 1990 levels by 2050.

The bill is met with little national fanfare and its implications, if they’re even understood, are largely dismissed as trivial.

Flash forward to present day.

An Inconvenient Truth has won an Oscar. The Intergovernmental Panel on Climate Change (IPCC) has issued a series of reports, authored by thousands of scientists, on the anthropogenic causes of climate change. Carbon trading is a $100 billion global market. And new-President Obama is intent on capping U.S. emissions in his first two years.

California’s AB32 is now in the national spotlight as a possible model for a national system, and there are mounting concerns about what, exactly, a price on carbon implies.

Carbon: Liability Is in the Eye of the Beholder

When a cap and trade system is implemented, carbon instantly becomes an asset and a liability. If you’re a big emitter of CO2, like coal-burning utilities, it’s definitely a liability. But if you’re a developer and manager of wind parks, which prevent carbon from entering the atmosphere, CO2 becomes an incredibly lucrative asset.

Some would say this is Big Gummint at its finest. But I’d say it’s been a long-time coming, and those on the liability side of things have had plenty of time to prepare. There have been voluntary carbon reduction schemes, like that offered by the Chicago Climate Exchange. And regional cap and trade programs sponsored by geographically connected states, like the Regional Greenhouse Gas Initiative (RGGI), have been in the works for years.

You can bet those for whom carbon is now an asset have been diligently preparing, honing their carbon reduction techniques and perfecting their monetization process for carbon credits. For those loyal to the cleantech world, a new revenue stream is about to be unleashed that will validate a transition to a new energy economy while finally acknowledging the full economic cost of burning fossil fuels.

AB32: Cap and Trade Cometh

According to the Scoping Plan of the law, the California Air Resources Board (CARB) "must adopt the cap-and-trade regulation by January 1, 2011, and the program itself must begin in 2012."

In case you’re not familiar, cap and trade is a system in which polluting entities are given a target level of pollution and each ton is worth one carbon credit. If you’re allowed to emit 20 tons and you only emit 16, you have four carbon credits to sell. But if you emit 24 tons, you must purchase four credits at the current price on the exchange.

In this system carbon credits are commodities. They are bought and sold on exchanges just like futures contracts, and their prices are subject to outside forces such as supply and demand and other legislation.

This is beneficial on many levels. Utilities are incentivized to reduce emissions, which inherently implies increased investment in either energy efficiency or renewable energy generation. Cleantech companies will see a nice bump on their balance sheets. The air will be a bit cleaner. And you can even turn a profit in the process.

Of course, AB32 only applies to California. But with Obama in the White House and Rep. Henry Waxman, a Californian, now at the helm of the Energy and Commerce Committee, it’s looking like AB32 will be a scale model of the national system.

Waxman has said he’ll move "quickly and decisively" to curb carbon emissions, with the goal of passing cap and trade legislation by Memorial Day.

And he even has the support of some strange bedfellows. When Waxman made his announcement last month, chairman of Duke Energy Jim Rogers was there. Rogers said a climate bill, coupled with a short-term stimulus could "put the recession in the rear-view mirror." That’s encouraging, coming from one of the nation’s most fossil-fuel intensive businesses.

They have to be on board, though. If they’re not at the table, they’ll surely be on the menu. That’s why Duke, along with dozens of other major polluters like Caterpillar, Alcoa, and ConocoPhillips, have formed the U.S. Climate Action Partnership, a "major businesses and leading climate and environmental groups that have come together to call on the federal government to enact legislation requiring significant reductions of greenhouse gas emissions."

This is the beginning of something very big. Something very beneficial. And something very profitable.

You’ll want to stay informed, because the capping of emissions has very far-reaching implications, and could even mean higher utility bills. By being informed, you can invest wisely in those turning carbon into an asset, and more than offset those higher energy costs.

Despite all the vitriol against cap and trade, it is truly a beneficial system. Surely those that it will adversely impact wouldn’t support it if it wasn’t. From what I’ve seen so far, it’s mostly those who don’t understand it that are the most opposed.

Make sure you understand it.

Nick Hodge is a regular contributor to Green Chip Review and Energy & Capital. One of the bright young minds in today's cleantech industry, Nick is putting his knowledge of nascent green markets to use in several ways. . . He's the Managing Editor of Alternative Energy Speculator, an investment advisory service focused on taking advantage of every aspect of cleaner energy, from the stop-gap companies that are making a fortune lowering carbon emissions to makers of more fuel efficient engines and other technologies that will help the U.S. successfully build a bridge from current fuel to the energy of the future. Nick also runs Green Chip International, which is dedicated to giving you the sharpest insight, not just into clean technology trends but also the geopolitical context that makes markets move. A featured guest on Canada's Business News Network and Yahoo!'s Tech Ticker, Nick is also very interested in uncovering the massive profit opportunities associated with a growing lack of freshwater and the maturation of the global carbon markets. Nick is also the co-author of the bestselling book, Investing in Renewable Energy: Making Money on Green Chip Stocks.