June 1 , 2002
GHG Compliance Complexities
Greenhouse-gas regulation will impose vastly greater compliance difficulties than did the Acid Rain program.
particularly intense battle looms over the amount of allocations that will be auctioned. Environmentalists in particular argue that all allocations should be auctioned. Utilities disagree among themselves about whether allocations should be based on kilowatt hours generated or on historic GHG emissions by generating unit.
A new aspect of GHG legislation is the practice of allowing regulated entities to use offsets to mitigate emissions and meet emission-allocation caps. Limits to the use of offsets are being hotly debated both nationally and internationally.
From a global-warming perspective, reductions of GHG emissions have equal value anywhere in the world, from any source. Under the Kyoto Protocol, offsets are certified for a variety of sources including: aforestation (planting trees), reducing emissions from Freon manufacturing, combustion of agricultural wastes, and many others. Offsets are often a more cost-effective way to meet allocation caps and therefore provide an invaluable “bridge to the future” needed by utilities in the next 10 to 15 years to meet emission-reduction goals while new technologies are being demonstrated and deployed. International offsets might cushion the near-term financial impact of emission caps more than anticipated—like rail deregulation did for Acid Rain compliance. Already 188 million CERs per year have been registered from 896 sources worldwide under the CDM mechanism in the Kyoto Protocol—91 million from China alone. This could make offsets more affordable.
However, offsets provide unprecedented challenges to ensure their legitimacy.
Ensuring a utility is not exceeding its allowable GHG-emission targets presents a far more complicated scenario for responsible executives than encountered with Acid Rain legislation. First, there is the challenge of monitoring and reporting emissions, tracking allocations and compensating offsets so a company knows the status of compliance at all times. The GHG challenge is that many of the offsets that will be available on the carbon market have no measurement or documentation methods like those available for SO 2 emissions. Offsets involving agriculture, for instance, will have to rely on protocols for calculating emission reductions and verifications by third-party auditors. These auditors will require credentials certified by responsible parties in a new system of regulations.
Further, issues of “leakage,” double counting, indirect emissions and outright fraud could undermine the credibility of the entire process. Double counting could occur if there is joint ownership of facilities or financial ownership but not operational control of a facility. Utilities will have to develop and subscribe to a common practice to avoid double counting. And things like transmission losses might be considered an “indirect emission”— i.e., emissions that are the consequences of the operations of the reporting company but actually occur at sources owned or controlled by another company.
As a result, new, legally challenging, internal protocols will need to be established for managing the risks associated with carbon markets. Groups like the World Resources Institute and ISO have published such protocols. The details will need to await future regulations, but the processes need to be established now to allow the development of new software tools, people skills and organizational structures (see sidebar, “GHG Regulation Competencies”) .
Further, strategic planning will be enormously more