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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

reaction will influence the structure and implementation of an expanded program.

Moreover, the implementation of any cap-and-trade system will require that point-source emissions be measured according to specified guidelines. In addition to these monitoring requirements, businesses likely will face stringent reporting requirements. Businesses should design, in advance, processes to ensure compliance by meeting monitoring and reporting requirements.

CO2 emissions from power plants probably will need to be monitored by continuous emission monitors and reported to the U.S. Environmental Protection Agency (EPA) under guidelines similar to those specified under Title IV of the 1990 Clean Air Act Amendments. While this is a fairly straight-forward process and the technology is readily available, it may require extensive industry-wide retrofitting that significantly could disrupt ongoing operations. Alternatively, emissions may be self reported and independently audited, similar to the system adopted by the Chicago Climate Exchange, where emissions are audited independently by the National Association of Securities Dealers.

Implementing these systems early will reduce the risk of violations and will allow for exploitation of trading opportunities. By keeping ahead of the learning curve, businesses can avoid significant startup costs as all industry players compete for limited technology and expertise in redesigning their business processes and activities.

Strategic Alliances

Companies need to begin forming strategic alliances that can provide expertise and offsets under the new program. By forming alliances, companies can expand their possibilities greatly for cost-effectively implementing abatement. These alliances should include large contributors to CO 2 emissions (heavy manufacturing, process industries, and car companies), companies within the supply chain (coal producers and transport providers), and technology providers. Alliances also could include companies that have the potential to create offsets, such as those within the agricultural and forestry industries. Additionally, alliances could pave the way for more cost-effective trading, and could provide greater leverage in shaping regulations.

Industry players also must designate a group internally or expand their current emission-allowance trading group to conduct CEC trading. This same group should have the capability to trade credits externally, or it should designate an external broker with whom to partner. In preparing for regulations, creating an internal trading system often is the first and most effective way to gain experience with trading and to understand internal abatement options. 3 Forming such internal groups now will give a company the experience it needs in developing a functioning trading capability to take advantage of all internal and external trading options.

In addition, as the ETS comes into force and the price of CECs increases, operators must consider costs of abatement both internally and externally. CECs and cheap abatement options could play an important role as part of an overall acquisition strategy. For example, as part of an overall acquisition strategy, a carbon-intensive plant can be acquired, cheap abatement (or even closing) instituted, and the excess credits traded to another plant or even traded on the open market. Savvy companies can use this mechanism to reduce otherwise significant abatement costs at existing plants.

Meanwhile, companies must have a detailed understanding of the CO 2 abatement costs at each facility. Under the