Posted: January 01, 2010
Guest Column: Like it or not, greenhouse gas emission regs are comingMark Mathews and David Scott
Congress is currently working on legislation that will establish a cap-and-trade program to slowly decrease the amount of greenhouse gases that are emitted in the U.S.
Think it won't impact your business? Think again.
If a company is not thinking today about how its business is going to be affected by the cap-and-trade program or how it will participate in the carbon market when the regulations are finalized, then it could be at a disadvantage when legislation passes. A clear understanding of the proposed cap-and-trade program may be critical to the future success of your business.
A cap-and-trade system is a market-driven regulatory approach that allows regulated sources to employ the most cost-effective means to meet decreased emission requirements. The program Congress is developing establishes a nationwide cap on emissions that slowly decreases over time. Each regulated emission source must have sufficient allowances granted under the legislation to cover each ton of its emissions in a given year. So, if a company emits 500 tons of greenhouse gases in a given year, it must submit to the government 500 allowances at the end of that year.
What happens if a company doesn't have sufficient allowances to cover its emissions? Companies can purchase or trade with other sources in the carbon market to acquire the allowances it needs to cover its emissions. Allowances can also be saved up in the "bank" for use in future years. To do this effectively, companies must plan ahead.
Some companies in particular economic sectors - electricity providers, home heating oil providers and certain trade-vulnerable industries, such as aluminum manufacturers and cement companies - will receive free emission allowances for the initial years of the program. However, these will eventually cease, and companies in these industries must still be prepared to acclimate to the new regulations.
Allowances are also provided to support various initiatives, such as the development of carbon capture and sequestration technologies. While a small number of allowances will be available via government auction during the initial years of the program, eventually the distribution of free allowances will cease, being replaced entirely by auction. Competition for these allowances will be fierce, not to mention the high price tag attached to the remaining allowances.
As a result of the founded concerns about allowance costs and potential job transfer to unregulated nations, Congress has included various provisions in the legislation. These include:
• Creation of "offset" credits. Offset credits are interchangeable with allowances and are generated by noncapped sources that take verifiable actions to reduce greenhouse gas emissions.
• Creation of "rebate" credits. Rebates will be available to certain trade-vulnerable industries that are energy-intensive to help cover the costs associated with program compliance. Rebates are also designed to help prevent such companies from transferring their business to other nonregulated countries.
• Establishing "price caps" on allowances. Both the House and Senate legislation have versions of a maximum price cap, beginning at $28 and increasing each year based in part on inflation.
This only skims the surface of the actual cap-and-trade program under development by Congress. Additionally, there could be significant changes in the program prior to its final passage in 2010 as more parties enter the debate on how the program should be structured.
Regardless, Colorado companies should engage now in order to be prepared to adhere to the regulations that the legislation implements once it is passed.
If your business emits carbon dioxide or other greenhouse gas pollutants in any significant amount, you must start developing a plan to respond to the coming cap-and-trade program. Now is the time to familiarize yourself with the carbon trading market to help you understand what is coming, how it will affect your business, and what you need to be doing now to prepare.
Mark Mathews is a shareholder in Brownstein Hyatt Farber Schreck's Denver office. As co-chair of the firm's natural resources group, his practice concentrates on environmental law, energy and
David Scott is an associate in Brownstein Hyatt Farber Schreck's Denver office. As a member of the firm's natural resources and water & public lands groups, his practice focuses on environmental, renewable energy and water law.