Business Revs Up for Carbon Regulation

Whatever an eventual carbon market looks like in the United States, Corporate America has been using this time to prepare for emissions rules that appear increasingly inevitable.

The corporate prep work completed to date “really does depend on the company”—its own financial health, the emissions challenges of its sector and other competitive forces—says Dan Bakal, director of electric power programs at Ceres, a Boston-based network of investors and environmental organizations that works with companies like American Airlines and McDonalds to tackle sustainability issues.

Bakal says a comprehensive inventory of all greenhouse gas, GHG, emissions is crucial, but he adds management teams also need to take a big-picture approach.

“We ask companies to look beyond the emissions, to look at what other strategic issues climate change might present,” he says. That includes, for example, new competitors or physical risks that they or their supply chain might face with rising oceans.

For companies looking to get a head-start on federal regulation, or for those making emissions reduction part of a wider corporate sustainability plan, a voluntary carbon market exists with the Chicago Climate Exchange.

A handful of regional carbon compliance markets are planned if nothing comes out of Washington. Only one of these operates currently. The Regional Greenhouse Gas Initiative, RGGI, in the Northeast, launched in 2005, auctions carbon allowances for some power in member states.

Slideshow: The Cleanest Companies

States are also moving ahead. California’s landmark Global Warming Solutions Act of 2006 – also known as AB32 – aims to reduces the state’s emissions outputs to 1990 levels by 2020, about a 25% reduction from “business as usual” emissions levels.

It is now tackling the problem through a variety of early-action measures, like regulating vehicle air conditioning systems and capturing landfill methane, but will eventually create a statewide cap-and-trade market.

But all eyes right now are on Washington D.C., where two pieces of legislation are before Congress.

The American Clean Energy and Security Act, ACES,  brought forth by Rep. Edward Markey (D-Mass.) and Rep. Henry Waxman (D-Calif.) was passed by the House in June. In October, Sen. Barbara Boxer (D-Calif.) and Sen. John Kerry (D-Mass.) unveiled a somewhat similar bill, the Clean Energy Jobs And American Power Act, in the Senate.

One key difference is that the Boxer-Kerry bill calls for a 20% reduction in greenhouse gases below 2005 levels by 2020, compared to 17% under Markey-Waxman. President Obama prefers a 14%-percent reduction.

But given the raucous healthcare debate, time and political will may be in short supply to get something done in 2009.

“Two-thousand and nine seems very unlikely at this point; then, next year raises questions,” says Kyle Danish, partner at the law firm Van Ness Feldman and his firm’s coordinator for their climate change and emissions trading practice. “Next year is a mid-term election year for Congress, which traditionally is not a time for complicated and controversial legislation. If it's going to happen next year at all, it likely will have to be enacted in the first part of the year.”

And the Environmental Protection Agency, EPA, is getting ready to step in whatever happens on the Hill.

Having lost a Supreme Court decision in April 2007 that defined carbon emissions as a pollutant, the EPA has its own plans to regulate even if legislation doesn’t happen. In early September, it sent a draft proposal to President Obama to regulate large sources of emissions, calling for caps on any sources that emit over 25,000 tons of CO2-equivalent greenhouse gases annually.

“We’re getting about 80% of emissions,” says EPA administrator Lisa Jackson about the agency plan, which should cover over 13,000 emissions sources, from energy plants to manufacturing to large animal feedlots.

Jackson admits it’s not a perfect plan, but it’s a start. “We’re not taking small businesses, and we’re losing 20% (of carbon), but were gaining that 80% and we’re gaining knowledge in the process,” she says.

But the approach is likely to keep EPA lawyers busy, since under the auspices of the Clean Air Act, which the agency monitors, any emissions source of over 250 tons of CO2 equivalents annually must be regulated.

“It’s unclear whether [the EPA] has the legal authority to change that number,” says Danish. “The CAA isn’t the best vehicle. “It’s set up to handle local pollution issues, and carbon is a global problem with millions of sources.”

But with all the activity at the state, national and international level, Ceres’ Bakal says Corporate America seems to have reached a tipping point and will begin tackling the issue on its own, as it did with health care.

“An increasing number of big businesses want something to come out of Washington on this issue,” he says. “This has been a long time coming.”

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