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Emission regulation is likely to be a reality in the United States by 2013. CFOs need to prepare a strategy for managing emission credits now...or watch that money go up in smoke.

Even though the United States does not have mandatory carbon caps, such companies as Intel and Honeywell that generate qualified emissions credits in a voluntary program may see the value of their credits soar in about two or three years. That is when the United States is expected to start regulating emissions in preparation for joining the Kyoto Accord in 2013, said experts at the CFO Green Conference in New York on March 26.

While the United States is not a signatory to Kyoto, all three Presidential candidates support joining the treaty, and experts are confident that a regulated carbon market is on the way. Once this country establishes a cap-and-trade program to regulate emissions, such as the one already in place in Europe, credits generated here voluntarily according to Kyoto standards will be tradable outside the country and their value will rise, experts believe. The European Union, already a Kyoto signatory, has had a regulated emissions market since 2005. Right now, a ton of CO2 trades in the United States for about $5, while in the European Union it fetches about $30. Josh Harris, a conference presenter who heads the voluntary carbon-markets program at the Climate Group, says carbon credits are expected to trade at about $37 by 2010.

CFOs would therefore do well to start lowering emissions and accumulating credits in preparation for the regulated markets. “Greenhouse emissions credits are a new commodity and are going to be traded as a commodity,” says Richard Adcock, senior vice president for origination and investment at the Climate Leaders Fund, which invests in projects that create carbon credits (using methane gas from landfills for energy is one such project).

Adcock says he believes that within a year or so after the Presidential elections, the United States will start a regulatory framework for implementing Kyoto. At the same time, Kyoto will be discussed internationally in preparation for the ending of its first phase and the beginning of its second phase. The next round of Kyoto talks will take place in Amsterdam in September 2009, when the next phase will be planned. At that point, CFOs will have a clearer idea of what the future carbon markets will look like. “We’ll see a bump-up in activity in about 18 months,” says Adcock. “You have federal legislation geared toward a cap-and-trade regime, which is what we believe is going to happen.”

In addition to the Presidential candidates’ support for lowering emissions, Congress has several bills for such systems in front of it. One of them, the Lieberman-Warner bill (S.2191) — dubbed America’s Climate Security Act of 2007 — is a cap-and-trade system, and is believed to be the most likely to be adopted according to Adcock and other experts at the conference. The bill has already been approved by the congressional committee and the U.S. Senate Environment and Public Works Committee, and is expected to move to the Senate floor for debate.

What Is a Regulated Cap-and-Trade Market?

In a regulated cap-and-trade market, a company has a baseline level of allowable emissions; say, for example, its emissions in 2001. Depending on the country, industry, and other factors, the company may be required under such a system to cap its emissions at 10 percent below its 2001 levels: if it emitted 100 tons of CO2 in 2001, its 2008 cap would be 90 tons. In addition, regulations may require that it reduce its emissions every year by a certain percentage.


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