As the comprehensive energy bill continues its way through the halls of Congress, we thought it might be a good time to take note of the potential effects for your company. Though the majority of the policy has yet to be written, much less pass, we’re taking a look at what could happen in order to create an action plan for all of us.
leaning towards cap-and-trade
The pressure on the government to enact policy regulating carbon dioxide (CO2) emissions is growing, as citizens increasingly fear the effects of climate change. Though some may feel that a cap-and-trade policy is not ultimately the most effective at curbing CO2 emissions, it is the route we are currently pursuing. The alternatives, a carbon tax or regulation of emissions by the Environmental Protection Agency (EPA), are not popular policies. Getting anything labeled a “tax” through Congress is nearly impossible and would not sit well with Americans in this economic climate. As for the EPA regulating emissions, that has received a big rejection from the business community. So we’re left with cap-and-trade.
what is cap-and-trade?
Cap-and-trade would set a cap on the CO2 companies are allowed to emit, and then gradually reduce the allowed levels over time. Companies that need to increase their emission allowance must buy credits from others who pollute less, creating the trade portion of the policy. The buyer is being fined, in effect, for polluting more, while the seller is being rewarded for reducing emissions more than required. Issues arise when determining the cost of this policy and where those costs fall.
possible effects of cap-and-trade
In short, the price of energy could become even more volatile. Cap-and-trade will create a new system for pricing carbon, adding volatility to the energy markets. The European system of cap-and-trade often experiences price movements of 17 percent a month. This volatility could lead to financial speculation on permit pricing, with energy companies having a distinct advantage in predicting future demand. Stefan Heck of McKinsey believes “cap-and-trade might add 20 – 30 percent to energy costs.” The rise in energy prices could increase production costs for American companies, decreasing their competitiveness in the world market. Businesses which can no longer compete with foreign producers would have to close or move–which is how we get back to asking whether this policy will move more of our industries to China.
Photo credit: voux
move to china? the answer is no
Well, perhaps no one knows for certain. Currently, it is unclear if higher energy costs will create a profit incentive to move to China. One should keep in mind that China is the world greatest emitter of CO2. They too will be facing internal and international pressures to implement a CO2 policy of their own, negating any prior energy price advantage. If that doesn’t happen, the U.S. would have the option of instituting carbon tariffs on goods from countries without a carbon cap. There are problems with this policy, notably with certain existing trade agreements as well as the tendency of other countries to enact tariffs of their own in response.
Reduce, reuse, recycle. Indeed, it may sound like something from 1996, right out of an episode of Captain Planet, but it should be your corporate mantra. Opportunities exist throughout the supply chain to put these techniques into action. Implementation is industry specific, however here are a couple of examples.
Wal-Mart is executing a plan to reduce their packaging five percent by 2013; they estimate that for Wal-Mart U.S.A. 667,000 metric tons of CO2 will not be emitted into the atmosphere, 66.7 million gallons of diesel fuel will be saved, and 213,000 trucks will come off the road annually. The bonus: Wal-Mart is saving money too.
In the textile industry, use of AirDye® technology can result in energy savings of up to 87 percent. Using AirDye can additionally eliminate excess inventories. This allows goods to be ordered as needed, better matching supply with demand.
When faced with a cap-and-trade policy that could increase the cost of energy 20-30 percent, will you reduce, reuse, and recycle, or do you plan on learning Mandarin?