Sustainability: Regulations

Preparing For A Carbon Cap-And-Trade Marketplace


Forthcoming government regulations will require food processors to gain a better understanding of how their carbon profile might affect their business.

Energy markets are changing. In the past, all that mattered was price and reliability. In the near future, there will be additional components to consider: carbon content and carbon cost. The current administration and Congress are rapidly moving toward the implementation of a mandatory carbon compliance system and a carbon cap-and-trade market.

The legislation, authored by Energy and Commerce Chairman Henry Waxman, may be passed yet this year. If this occurs, the Waxman bill will implement a carbon cap-and-trade market by 2012 and further President Obama’s plan to reduce the country’s carbon dioxide emissions 20 percent by 2020.

Prior to the approval of this legislation, the Environmental Protection Agency (EPA) has begun drafting rules requiring certain energy users, including 13,000 factories and power plants across a range of industries, to report greenhouse gas (GHG) emissions beginning in 2010. These emissions include carbon dioxide, methane and nitrous oxide; all common emissions generated by industrial energy users.

These likely changes will require food processors to gain a better understanding of how their carbon profile might affect their businesses. To do so, each business should review its major sources of carbon, generate estimates of what the cost of carbon may be under varying price assumptions and, most importantly, estimate how your business will be impacted.

WHAT ARE THE SOURCES OF CARBON?

There are four broad sources of carbon emissions that will likely be covered under the proposed cap-and-trade system: transportation and oil-derived fuels, electric generation, natural gas and industrial processing related emissions. Collectively, these segments cover the vast majority of anthropogenic (human-caused) carbon emissions. The chart (CO2 Emissions by Type) shows the carbon emissions for each segment and total covered emissions.

As you can see, transportation/oil derived fuel is the largest segment followed by electric generation and natural gas. Direct industrial process emissions account for the smallest amount of carbon.

HOW WILL A CARBON CAP-AND-TRADE MARKET WORK?

Simply put, a cap-and-trade market places a limit on the amount of greenhouse gases that can be emitted by industries and creates a fee-based allowance for every ton of carbon emissions produced by energy users.

The emission cap declines over time as businesses continue to lower their overall emissions and as lower targets come into effect. This system creates economic incentives for energy users to find cost effective methods to reduce carbon emissions and instead implement more energy-efficient technology or rely more on renewable energy resources.

Each covered entity will be required to hold allowances equal to or greater than their emission levels. Entities that are more efficient will be required to hold fewer emissions and will have an associated lower operational cost. On the other hand, entities that are less efficient will be required to hold more allowances and will have a higher operational cost.

Under the cap-and-trade system suggested by Obama in his 2010 budget, carbon emissions from the above segments will require offsetting emissions allowances based on the amount of emissions (per metric ton) each energy user creates. The allowances will be “auctioned” by the federal government. The President has budgeted $75-$80 billion dollars per year in revenue from the auctioning of permits, starting in 2010.

After the allowances are auctioned, there likely will be a secondary market for carbon offsets and allowances. The secondary market will allow businesses to bank and trade unused allowances to facilitate market liquidity and transparency. This market will allow energy users to buy and sell the unused allowances based on each emitter’s unique situation.

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