Green Effort Gets Energized

A host of regulatory options have been introduced that would have widely varying consequences for companies that emit greenhouse gasses.

One nightmare scenario is an outright tax on carbon emissions, which could seriously stymie U.S. economic growth and be particularly burdensome for the energy and transportation sectors.

Another regulatory option is a network of state greenhouse gas programs, all with their own emissions caps. In 2003, then-New York Gov. George Pataki convinced eight other Northeastern states to support a regional cap-and-trade system.

Scheduled to go into effect in 2009, the program would cut greenhouse gas emissions 10% below 1990 levels by 2010. California Gov. Arnold Schwarzenegger has proposed a similar program that would lower emissions by as much as 25% over the same period.

Companies worry that operating under varying state systems would be impossibly complicated. For example, the automobile sector would have to build cars for the strictest emissions environment, because it couldn't easily build different cars to fit different state rules.

Additionally, competitors operating in different states could be given competitive advantages depending on where they operate. Refiners with operations in traditionally oil-friendly states like Texas may have lower emissions caps than refiners in stricter states like California.

"Businesses are now in the awkward position of seeking federal protection from the states," said Terry Tammimen, director of the Climate Policy Program at the New America Foundation, a Washington-based public policy group.

Turning to Trading

Meanwhile, companies no longer can be confident that their capital investments won't trip over future environmental legislation. This trend has played out in recent weeks when Kohlberg Kravis Roberts disclosed a proposal to acquire Texas electric utility TXU (TXU Quote). To get the support of environmentalists, KKR agreed to remove eight coal-fired power plants from TXU's 11-plant expansion plan.

Even though coal remains the cheapest source of fuel for power plants, its future in the grand energy policy scheme is too uncertain to make future coal investments exceptionally attractive.

To circumvent these scenarios, many companies and strategists, including those behind USCAP, are throwing their weight toward a cap-and-trade system that would apply market fundamentals to the greenhouse gas emissions regulatory process.

The main component of the system is a financial market in which emissions credits, measured in tons of greenhouse gasses, are bought and sold. Firms that are unable to meet their emissions quota must buy credits in the marketplace.