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04/22/2009

Cap and Trade Carbon Markets

“The energy sources that we have today are changing our climate and the environment catastrophically and irreparably.” This comment in my Saturday morning paper from Mike Lazaridis, President and CEO of Research in Motion, got me thinking again about the drivers we need in order to incentivize investment in low emitting sources of generation. The carbon cap and trade programs currently being considered in the United States would create such a driver - by putting a price on carbon.

You may ask how a cap and trade program puts a price on carbon. Although the details and implementation are very complex, the principle is straightforward. The government would put a cap on emissions by allocating or auctioning a fixed number of allowances, which gives the owner the right to emit one tonne of greenhouse gas. Companies with low cost opportunities to reduce emissions will do so, making more allowances available to companies with fewer options to reduce. The carbon price will emerge as the marginal cost of making the most expensive reduction needed to satisfy the cap. The cap and trade programs being discussed include most high emitting industry sectors, such as fossil fired electricity generation, oil and gas production and transportation, cement production, and ceramics manufacturing.

Most schemes also provide for “offset projects,” which must be outside the capped sectors, thereby reducing emissions below their “business as usual” emissions level. The project owner receives emission reduction credits, which can be sold into the cap and trade market. These offset credits can often be developed at lower cost than mitigating emissions within the cap and trade sector, so they are an important cost control.

One regional cap and trade scheme is already operating within the United States, the Regional Greenhouse Gas Initiative (RGGI), which includes electricity generation in 10 northeast states. I’m most excited about the Western Climate Initiative because it is broader in scope, with nearly 90% of emitting sources included. It also covers a broad geography, including seven western states and four Canadian provinces. Driven in part by regulation being developed in California, this market serves as a thought incubator for the rest of North America.

To be truly effective, to create a level playing field for our industries and consumers, I believe a carbon cap and trade scheme really needs to be federal.  During his campaign President Obama committed to such a national carbon market, and he has taken important steps to support its development. In his first speech to Congress, Obama said:

“To truly transform our economy, to protect our security, and to save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy … So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America. That's what we need."

Congress is responding. On March 31, Senators Waxman and Markey released their draft bill “American Clean Energy and Security Act of 2009,” which would regulate industries responsible for 85% of United States emissions. Waxman and Markey hope to have the bill through committee by Memorial Day 2009 – an aggressive schedule.

Cap and trade schemes will undoubtedly have significant business implications for emitting industries, energy consumers, and the American public. At Deloitte we’ve given a lot of thought to these consequences, and you can read about them in our white paper – “Confronting the Carbon Challenge.” Perhaps these business implications are necessary, and unavoidable, if we are to make the transition to a low carbon economy and avoid potential catastrophic consequences
Let me know what you think about the emerging carbon markets.

Pat Concessi
Leader - Climate Change and Sustainable Resources, Deloitte Touche Tohmatsu

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Correction re. "Congress is responding. On March 31, Senators Waxman and Markey released their draft bill “American Clean Energy and Security Act of 2009."

This bill was introduced in the House of Representatives, not the Senate. Waxman's and Markey's title is "Representative" or "Congressman," not "Senator."

Thanks,

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