Cap and Trade Rules
Cap and Trade Legislation: Will California's AB32 Go National?

February 9, 2009

Flash back to late September, 2006.

In California, the Governator has just signed Assembly Bill 32 (AB32), a
Kyoto-style policy aimed at reducing greenhouse gas (GHG) emissions to 1990
levels by 2020, followed by an 80% reduction below 1990 levels by 2050.
The bill is met with little national fanfare and its implications, if they're
even understood, are largely dismissed as trivial.

Flash forward to present day.

An Inconvenient Truth has won an Oscar. The Intergovernmental Panel on Climate
Change (IPCC) has issued a series of reports, authored by thousands of
scientists, on the anthropogenic causes of climate change. Carbon trading is a
$100 billion global market. And new-President Obama is intent on capping U.S.
emissions in his first two years.

California's AB32 is now in the national spotlight as a possible model for a
national system, and there are mounting concerns about what, exactly, a price on
carbon implies.

Carbon: Liability Is in the Eye of the Beholder

When a cap and trade system is implemented, carbon instantly becomes an asset
and a liability. If you're a big emitter of CO2, like coal-burning utilities,
it's definitely a liability. But if you're a developer and manager of wind
parks, which prevent carbon from entering the atmosphere, CO2 becomes an
incredibly lucrative asset.

Some would say this is Big Gummint at its finest. But I'd say it's been a
long-time coming, and those on the liability side of things have had plenty of
time to prepare. There have been voluntary carbon reduction schemes, like that
offered by the Chicago Climate Exchange. And regional cap and trade programs
sponsored by geographically connected states, like the Regional Greenhouse Gas
Initiative (RGGI), have been in the works for years.

You can bet those for whom carbon is now an asset have been diligently
preparing, honing their carbon reduction techniques and perfecting their
monetization process for carbon credits. For those loyal to the cleantech world,
a new revenue stream is about to be unleashed that will validate a transition to
a new energy economy while finally acknowledging the full economic cost of
burning fossil fuels.

AB32: Cap and Trade Cometh

According to the Scoping Plan of the law, the California Air Resources Board
(CARB) "must adopt the cap-and-trade regulation by January 1, 2011, and the
program itself must begin in 2012."

In case you're not familiar, cap and trade is a system in which polluting
entities are given a target level of pollution and each ton is worth one carbon
credit. If you're allowed to emit 20 tons and you only emit 16, you have four
carbon credits to sell. But if you emit 24 tons, you must purchase four credits
at the current price on the exchange.

In this system carbon credits are commodities. They are bought and sold on
exchanges just like futures contracts, and their prices are subject to outside
forces such as supply and demand and other legislation.

This is beneficial on many levels. Utilities are incentivized to reduce
emissions, which inherently implies increased investment in either energy
efficiency or renewable energy generation. Cleantech companies will see a nice
bump on their balance sheets. The air will be a bit cleaner. And you can even
turn a profit in the process.

Of course, AB32 only applies to California. But with Obama in the White House
and Rep. Henry Waxman, a Californian, now at the helm of the Energy and Commerce
Committee, it's looking like AB32 will be a scale model of the national system.
Waxman has said he'll move "quickly and decisively" to curb carbon emissions,
with the goal of passing cap and trade legislation by Memorial Day.

And he even has the support of some strange bedfellows. When Waxman made his
announcement last month, chairman of Duke Energy Jim Rogers was there. Rogers
said a climate bill, coupled with a short-term stimulus could "put the recession
in the rear-view mirror." That's encouraging, coming from one of the nation's
most fossil-fuel intensive businesses.

They have to be on board, though. If they're not at the table, they'll surely be
on the menu. That's why Duke, along with dozens of other major polluters like
Caterpillar, Alcoa, and ConocoPhillips, have formed the U.S. Climate Action
Partnership, a "major businesses and leading climate and environmental groups
that have come together to call on the federal government to enact legislation
requiring significant reductions of greenhouse gas emissions."

This is the beginning of something very big. Something very beneficial. And
something very profitable.

You'll want to stay informed, because the capping of emissions has very
far-reaching implications, and could even mean higher utility bills. By being
informed, you can invest wisely in those turning carbon into an asset, and more
than offset those higher energy costs.

Despite all the vitriol against cap and trade, it is truly a beneficial system.
Surely those that it will adversely impact wouldn't support it if it wasn't.
From what I've seen so far, it's mostly those who don't understand it that are
the most opposed.

Make sure you understand it.


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