“The average American has no clue what is about to hit them. Neither does the average investor. The magnitude of the life changes we’re about to see is simply incredible.”
This is how Catherine Elder, an energy expert at noted consultancy R.W. Beck, describes what will be the impact of a federally-imposed system to regulate the U.S.’s carbon dioxide emissions. Such a system will create a nationwide “cap-and-trade” financial market that permits companies that reduce their carbon “footprint” below a federally-prescribed annual limit to profit at the expense of those that do not. They will profit by selling “credits” based on how many tons of CO2 they eliminate over and above what they will be required to. (One ton will equal one credit.) Each year the limit will be lowered, the idea being to gradually reduce atmospheric levels of this greenhouse gas without seriously impairing economic growth.
According to Elder and other experts, the U.S. is about to become the last and most important link in what will be a global cap-and-trade financial market. With cap-and-trade already a $100 billion annual market in Europe, with new markets ready to launch in Australia and Japan, and with regional markets already operating in the Northeast and Western parts of the U.S. as well as in parts of Canada, Washington’s entry into cap-and-trade will mark the dawn of a new age of investing.
This will be an age where investors must pay close attention to a company’s carbon footprint because the size of it is going to impact everything else including gross revenue, operating expenses and, of course, net income. The stakes are going to be huge. In addition to directly impacting the bottom lines of many millions of companies all over the world, cap-and-trade is going to create a new asset class – carbon – that will be traded like stocks and bonds. Eventually, according to Peter Fusaro, head of carbon specialty consultancy Global Change Associates, carbon trading may become a $2 trillion or more annual market.
“This market is simply going to be massive,” says Larry Kristoff, CEO of Seattle-based Mantra Venture Group Ltd., a company developing commercial-scale technology for converting CO2 into an economically-useful chemical product called formic acid.
How soon before the U.S. has a national cap-and-trade financial market? According to Elder, “It would be foolish not to assume” that cap-and-trade will arrive in 2009, although it could take a year or more to gear up for actual trading. According to experts including Elder, the Obama administration is committed to cap-and-trade as part of the new president’s plan for a “green” revolution where non-polluting power sources such as solar and wind, plus greater energy efficiency and better environmental controls for CO2 emissions from tailpipes and coal-fired power plants, all add up to a “cleaner” economy that creates millions of new green jobs.
Republicans in the new Congress would likely try to block any cap-and-trade legislation that was introduced on the grounds cap-and-trade costs too much, especially during a recession. But Elder says that, under the federal Environmental Protection Agency, the new president already has the authority to establish such a market. Indeed, Elder says bureaucrats in Washington are already busy writing the necessary new regulations.
Experts say generally that the long-term goal of governments will be to coordinate their CO2 regulations in a way that gets the market price of a one-ton carbon credit up to around $80 to $100, compared with about $30 to $40 currently in Europe. Such a price level would set off a flurry of carbon-reducing activity.
Carbon trading is about to make the financial world very flat indeed. Consider: a company in the U.S. may buy carbon credits from a company in England that generated those credits by improving the energy efficiency of its manufacturing facility in India.
All trades will go through a new breed of market-maker whose job will be not just to trade carbon credits but, in many instances, to find and execute projects that result in carbon credits being generated. For example, a company in Japan may go through a market-maker in London to buy credits which that market-maker generated for its own account by, for instance, underwriting the cost of a windmill farm in South America or a cellulosic biofuel farm in Africa.
This will be an age of vast new investment opportunity – and also risk. “People haven’t thought carefully about all that it’s going to take” to create this new trillion-dollar market, Elder said emphatically. “It’s easy to say the market will solve (any problems). But the fact is it’s going to take a real range of actions.”
Indeed, while it’s clear that the bottom line of virtually every company in the world is going to be impacted by carbon regulation, for how long and to what extent are critical questions that remain unanswered.
More on all the uncertainty surrounding cap-and-trade (including the potentially disastrous effect it could have on America’s energy supplies) tomorrow and Wednesday in Parts 2 and 3 of this Special Report.
For more please see:
Green Accounting Expert Bruce McCabe: How Many Stars Does your Breakfast Cereal Have? (Part 2 of 3)
Carbon Guru Fusaro: Market May Grandfather in $ Billions From Today’s Carbon-Reduction Projects
