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Trading on Carbon: How Markets Will Save the World

Utilities should plan for U.S.-wide CO2 emissions restrictions that will be more effective than state efforts.

Fortnightly Magazine - January 2007

There is another issue of what to do with the tax dollars generated by the carbon tax. While some propose to return it to those most affected by the tax through income and corporate tax breaks, this would only help negate the incentive to reduce emissions in the first place.

In terms of subsidies, grants, and tax incentives this method would be seen as an expansion of the current U.S. legislative approach to controlling CO 2. Additional incentives could be created to promote the development of less carbon-intensive technologies. Given that the rate of CO 2 emissions steadily has increased despite the existence of similar subsidies, this approach, in isolation, will not reduce the use of carbon-intensive fossil-fuel technologies.

Alternatively, when using a combination of approaches, the most politically acceptable and effective method to reducing emissions may include a combination of all three approaches described here. The imposition of a cap-and-trade scheme is practically a certainty for the utilities industry, while a carbon tax may be most appropriate for the transportation sector. Additionally, the federal government likely will use any income from these programs to promote development of carbon-efficient technologies through subsidies and various incentives.

Creating an Emissions Strategy

Energy producers should take steps to prepare for the coming U.S. cap-and-trade system. Specific steps can be taken now to position a company to minimize the inevitable business expense and disruption that will be caused by the implementation of CO 2 emission caps.

Companies that will prosper in this new environment should have in place, prior to the implementation of an emissions trading system (ETS):

1. Mechanisms to influence regulatory and legislative actions;

2. CO 2 monitoring and reporting processes;

3. Strategic alliances;

4. Internal and external trading capabilities;

5. Pricing carbon emission credits (CECs) and abatement options as part of an acquisition strategy;

6. Systems for accessing and understanding abatement costs at each facility;

7. CEC price-dependent plans of action;

8. Technology and sequestration assessments;

9. Fuel-mix assessments; and

10. Reputational positioning plans.

Each company should strive to create a regulatory framework that will create a competitive advantage. Strict and broad federal requirements will not necessarily put undue burden on any individual player. They may, however, put the industry as a whole at a competitive disadvantage by substitution of industries and foreign competition that is not covered by the cap-and-trade system. While foreign competition to U.S.-based electric generators is minimal, electric-power generators will be affected by decreased demand as their customers switch from electricity to other forms of energy not covered by a cap-and-trade system. This could mean a move from electric heating to natural gas, or a move by industrial customers to build small generating stations not covered by the cap-and-trade system.

It is in the best interest of all electricity producers to lobby for a broad program that covers multiple industries and a wide geography. Additionally, there are numerous specific regulatory factors that will determine the industry winners and losers. The early winners will be the companies best able to shape regulations, recognizing that the industry’s initial position and