I seem to have struck a nerve with my column on carbon (June 2008). I will try this month to clarify the issue. The following depicts my understanding (since I am not an expert) with a little predicting as to how this will all play out.
No, the cap and trade will not be enforced on every manufacturer in the country. Small manufacturers will probably not be affected by the caps and can continue “business as usual,” if you are so inclined.
The formal mechanisms for monitoring or even controlling greenhouse gases (GHGs) in the United States have not been defined. The EPA and the government have not yet implemented any meaningful legislation. In early June 2008, a bill known as the Lieberman-Warner Climate Security Act reached the Senate floor and died after failing to reach the three-fifths vote needed to obtain cloture, according to the US Senate Roll Call. A similar bill, HR 6186 (better known as iCAP), has been referred to committees.
It will take some time for the bureaucracy to agree on what we need to do -- time we really don’t have!
Mandatory MarketIn the end, the United States probably will have a “cap and trade” system implemented. By some method yet to be determined, a “bucket” of carbon emissions, the cap, will be divvied up amongst the states based on criteria, again yet to be determined. Each state then will issue -- or sell -- certain industries their portion of the cap. The cap will be divided amongst the significant players in each industry. This will be the permissible annual emission from the significant players in the certain industries.
These certain industries will most likely include power generation, oil and gas, pulp and paper, smelting and refining, iron and steel, mining, cement, lime and chemicals manufacturing. Significant players will be the major companies in the sector and will not include “small” companies involved in these industries. The significant players in certain industries will be subject to mandatory reductions in greenhouse gas emissions. This group does not include most of you.
The method of measuring the carbon emission will not be by special carbon dioxide sensors located on each and every emission point. Rather, for the majority of cases, it will be calculated based on the conversion of fossil fuels into energy; that is, the power usage. There are published tables and recognized methods for calculating the emission of carbon dioxide for each kilowatt consumed.
The initial bucket of emissions will be quite generous. Most companies in the mandatory market will be able to operate within the allowance and still have excess emission volumes. Emissions are measured by ton or equivalent ton of carbon dioxide (CO2) and are known as carbon emission units (CEUs). Each year, the allocation will be reduced; the idea is that companies will implement technology to meet or exceed the new cap. Any remaining emission allowances between the actual level and the cap are termed credits. Credits would be verified and issued as an emission certificate, which would allow them to be traded, hopefully on a free market.
If a company has credits, it can sell them. If a company emits more that its allocation, it can buy credits to balance its emissions. There also will be other methods to generate and access credits to comply. The Kyoto agreement offers “flexible mechanisms” that allow companies to balance emission in other ways.
The “carbon world” has more acronyms than any industry I have ever come across, so understanding these mechanisms can be challenge. Among the mechanisms are certified emission reductions (CERs), emission reduction units (ERUs) and verified emission reductions (VERs) certificates. In addition, other terms such as emission reduction credits (ERCs) are duplicative names, thereby throwing out more acronyms.
In the carbon world, you can have a discussion with someone without ever saying a complete word. For instance, you get a CER from a CDM and an ERU from a JI.
The clean development mechanism (CDM) allows U.S. companies to offset emissions by funding projects or purchasing carbon credits generated by projects hosted in developing countries that qualify for the additionality credits. A joint implementation (JI) is similar to a CDM except here the project must assist the industrialized countries in meeting their emissions. Only freed-up emissions against business as usual (additionality) will be eligible as ERUs.
More on carbon credits next time.