Carbon Challenge

CNBC's Carbon Council Backs Cap and Trade

With President Barack Obama now committed to attending the final days of the Cop15 climate meeting in Copenhagen, the debate over how the world should reduce emissions remains as controversial as ever.

A key component of the deal that is expected to be agreed upon in principle by the end of next week is the formation of a Cap and Trade system. Aimed at capping the level of global carbon emissions the Cap and Trade system will create a market for carbon emissions that will allow the buyer to pay a charge for polluting and the seller to be rewarded for having reduced emissions by more than was needed.

Business leaders from across the world who make up the CNBC Carbon Council have outlined their views on the new system.

While there is division among the politicians, scientists and voters on Cap and Trade and its implications, the business leaders we have spoken to back the system as a cheap, cost-effective way of cutting emissions and giving them the clarity needed to invest.

To help focus the discussion, we talk to a Cap and Trade advocate and skeptic who favors a carbon tax instead.

The Believer

Patrick Birley is the CEO of European Climate Exchange, which is the world leader in trading of carbon emissions in Europe and the world.

European Climate Exchange

Europe has the most advanced Cap and Trade system on the planet and Birley said that the market, while not perfect, is evolving all the time and overcoming initial teething problems.

Each time a problem has been identified it has been fixed in a pragmatic way that the rest of the world can learn from, Birley said.

Crucially, he said he believes the system is working and has incentives for European businesses to invest in the opportunity that Cap and Trade represents.

"European businesses are re-tooling their power production towards low-carbon technology and this will serve them well in the long-term," he said. "As other countries impose similar caps, European industries will be able to export their early knowledge and skills to the rest of the world."

The Skeptic

Bjørn Lomborg, the author of ‘The Skeptical Environmentalist’ said Cap and Trade is a good idea, in theory.

Forget About Cutting Emissions

In practice, the system has been and will continue to be a spectacular failure that will simply favor those companies individual governments choose to offer free permits too, Lomborg said.

The big winners from Cap and Trade have been the European energy companies at the expense of consumers, he added.

"They got all the permits for free and ended up charging the customers," he said. "They got between 10 and 20 billion euros in windfall profits per year. The Waxman-Markey is pretty much the same thing. It's a catalogue of inefficiency, that’ll create pork bellies, horse trading. It will give away permits to the industry. It’s a poor way to help climate change"

(Waxman-Markey is a US bill designed to combat climate change.)

Instead, Lomborg said he believes a carbon tax would be a far better option.

"A reasonable carbon tax would be around $7 per tonne of CO2," he said. "But it’s no fix to fight climate change. Other approaches would be to invest in R&D, in clean tech and geo-engineering. This technology will be more effective. One dollar of this technology will avoid 2000 dollars in climate damage."

"Trying to lower CO2 emissions will cost $1 for every 2 cents of climate damage avoided," he said. "Geo-engineering and other clean technologies are 500 to 5000 times better."

The Carbon Council's View

Chad Holiday, the Chairman of Dupont (US)

“DuPont supports a system that puts a cap on greenhouse gas emissions and allows the market to decide where best to make reductions, rather than a command and control approach.

Putting a cap on emissions will ensure the environmental outcome, and trading helps deliver that outcome at the lowest cost to the economy as a whole.  On the other hand, a carbon tax assures the price of emissions, but can not guarantee that target emissions reductions will occur without constantly revising the tax as the economy responds. Furthermore, in today's economic environment, enacting a carbon tax would be politically very difficult.”

Lars G. Josefsson, the CEO of Vattenfall (Sweden)

"The first priority of climate policy is to address the emissions from large industrial plants and power plants. Policy must convince these industries that it will cost too much in the long term to run a plant that emits CO2. This means either a Cap and Trade system or a carbon tax; I believe that Cap and Trade is more trustworthy in the eyes of business.

Taxes are more likely to be repealed or lowered for political reasons, while carbon markets create a broader range of stakeholders who have an interest in preserving the policy. The European system has received some criticism, but this is misguided. Its effectiveness cannot easily be measured over 3-4 years. The key is that expectations change long-term decision-making. This is already happening. The priority now has to be making the carbon price as global as possible.”

Dr Zhengrong Shi, CEO and Chairman of Suntech Power (China)

"We at Suntech Power, the largest global producer of crystalline silicon solar panels, can see how carbon policies -- of either Cap and Trade or carbon tax approaches -- will spur job growth around the world and offer climate protection at a net economic benefit. We believe that either a Cap and Trade or a carbon tax could help stimulate demand for solar if designed well.

But companies and investors can not and will not invest to the scale needed to rise to our challenge without some sort of policy certainty.  Since a carbon tax is usually politically more challenging, we support the nearer-term certainty from cap and trade mechanisms.  Even so, there are many design elements which could weaken demand for solar if not designed properly, such as the number and system of awarding allowances, and the standards and limitations on offsets."

Hans Wijers, CEO of AkzoNobel (The Netherlands)

"Within a range of possible trading schemes, Cap and Trade is the only one that is guaranteed to reduce emissions, as the amount of allowed emissions is 'capped.'

Setting the right cap is not simple but achievable. We do need a global price on CO2 that is high enough to accelerate the transition to a low carbon economy. The sooner the price mechanism is in place the better. The longer we wait the less affordable climate change mitigation will become. The perspective of a low-carbon, sustainable society does not need to be positioned as a risk to sustainable economic business success.

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But let's turn it around and look at the bright side and position the journey to a low carbon economy as a paradigm shift, requiring a step change in technological development. W can create a society that will create many exciting, inspiring and challenging jobs."

Leo Apotheker, CEO, SAP (Germany)

"We as a global society must put a price tag on carbon to make 'green energy' a priority in today’s market. Associating a cost with carbon emissions creates a powerful mechanism to offer financial incentives for those who work toward and engage in a low-carbon economy.

Cap and Trade, taxing carbon, and subsidizing 'green energy' are all promising approaches that can be leveraged to ultimately urge societies to reduce emissions. For example, in Germany green energy subsidization has allowed for 14 percent of wind power and 4 percent of solar power to be supported through private investment.

A price on carbon will encourage innovative companies to continue to invest in and develop effective technology solutions to manage emissions.

At SAP we believe that technology is key to providing transparency and clarity into a company’s environmental footprint, and that it will also drive greater energy efficiency and resource productivity across all aspects of business. Stakeholders are increasingly demanding that businesses address sustainability holistically, from an economic, environmental, and social standpoint."

Mike Mack, CEO, Syngenta (Switzerland)

If we agree that cutting greenhouse gas emissions globally needs urgent action to counteract its effects on our climate, a Cap and Trade -- though still an imperfect mechanism -- may be today’s first-best option. However, we should not stop there and instead continue to look for improved or better alternatives.

But a Cap and Trade agreement is not the entire solution. Additional steps can be taken to mitigate emissions, simply by using existing materials, know-how and technology. While future innovation and research will help, and certainly governments should get behind them, we should look at the landscape around us and focus on what can be done today.

And agriculture needs to be part of that landscape. Globally, the sector adds one third of all man-made greenhouse gas emissions. But it also has the potential to significantly decrease the amount of carbon in the atmosphere. Farmers can adopt plant and soil management practices that will sequester carbon in the soil, such as switching to conservation tillage farming and simply stopping the conversion of natural habitats to arable lands which leads to a significant loss of biodiversity.

Incentives from a cap and trade mechanism would encourage these practices. Farmers could sell earned offsets from carbon sequestration to companies looking for ways to compensate for their own emissions. Since new carbon policies will likely result in overall rising energy costs, offset revenues to farmers will help ensure that solving the carbon challenge doesn’t further exacerbate a food security challenge.

Ultimately, addressing these challenges will require changing government policies, but also significant changes in mindsets and personal behavior. In the end, this will change the economic self-interest of companies and people around the world. With more than a third of the world population living and working on farms, we should not overestimate the enormity of this undertaking.

John Rowe, chairman and CEO, Exelon Corp.

Finding the right response to climate change is an issue I have worked on for more than 15 years.  I first testified before Congress on the issue in 1992.  In 2004, the bipartisan National Commission on Energy Policy, which I co-chaired, recommended a Cap-and-Trade system. I believe that Cap and Trade is actually the cheapest way of addressing climate change.  To minimize the burden on our economy and consumers, we need a market-based approach that rewards and supports the low-cost solutions.  Exelon supports Cap-and-Trade legislation because it incentivizes companies like ours to find the cheapest options. 

As part of Exelon 2020 – our program to reduce, offset, or displace our entire carbon footprint – we analyzed all the options for reducing CO2 emissions and determined the price per metric ton of CO2 needed to make each option economic.  The most cost-effective options are improvements in energy efficiency and capacity expansions at our existing nuclear plants. 

Ironically, governmental actions so far tend to subsidize the expensive solutions.  For instance, the government has long promoted wind generation, which costs between $45 and $80 per metric ton of avoided CO2 emissions.  Federal loan guarantees support new nuclear plants, which are economic at prices of roughly $75 per metric ton of avoided CO2.  Coal with carbon sequestration costs $150 per metric ton, and solar costs nearly $700 per metric ton of CO2.  Each of these options is ultimately more expensive to American electricity consumers than Cap-and-Trade legislation. 

While addressing climate change will cost money, doing nothing is not an option and, in fact, will cost more.  If the U.S. Congress does not act, the U.S. EPA will.  The result of such a command-and-control approach will be more arbitrary, more expensive, and more uncertain for investors and industry than a reasonable legislative solution. Furthermore, without prompt action, American companies will be caught in a carbon purgatory: we will lack the legislative certainty we need to make the substantial investments required to move toward a low-carbon future.