If you read our blog on a regular basis you’ve seen us write about the “Carrot and the Stick” in relation to greenhouse gas (GHG) regulation from the government. We saw the demise of the senate bill to address GHGs through a cap-and-reduce (a.k.a., cap-and-trade or cap-and-tax) program, most recently known as the American Power Act. When it comes to difficult decisions, congress does not have the ability to lead. That is fine. As someone I know well says, “you have to lead, follow or get out of the way.” Congress just got out of the way. We predict they will follow next.

For the past several years while congress has failed to pass comprehensive legislation to combat climate change, the EPA has been pushing carbon reduction every step of the way. First, they had GHGs classified as pollutants under the Clean Air Act. At the start of 2010 they asked big emitters to start measuring their CO2e levels. Along the way the EPA has even withstood legal questions about their ability to regulate GHGs.  Now that lawmakers have failed to act do you think the EPA will sit back and do nothing?

The older members of congress remember that back in 1991 cap and trade was originally proposed by Republicans as a way to stop the EPA from directly regulating acid rain-producing SOx and NOx. (That first experiment in cap and reduce worked so well that the Europeans adopted a similar system to abide by the Kyoto Protocol.) History has a way of repeating it’s self and we predict that within the next six months the EPA will introduce a laundry list of GHG regulations that will have even the staunchest climate denier pleading for a cap-and-reduce bill.

So if you think cap-and-reduce legislation is dead, think again.  There is a sleeping giant that is about to wake up.

The disaster in the Gulf is a sign that major industries, especially oil companies, need more stringent and enforced regulations. The failed safety systems and evacuation plans on the Deepwater Horizon prove that even when laws may be in place, they are not often followed.
Unfortunately, the same holds true for companies outside the Gulf. Exxon, the oil company responsible for the Valdez ship spill in 1989, has reportedly violated thousands of air pollution laws since 2005 without any repercussions. Other petroleum companies are under fire from the Sierra Club and other environmentalist groups, who claim that Texas regulators have failed to monitor, control and enforce emissions standards for years.
What are the costs of all this noncompliance? Many studies have shown clear correlations between high levels of air pollution and health problems, ranging from childhood asthma to premature death.  By not properly regulating emissions from these corporations, state and federal government officials are costing our country billions in healthcare costs annually, as well as an incalculable amount of money from ecological damage.  And unfortunately, retroactive punishment – slap-on-the-wrist fines and citations for continually over-emitting pollutants – do not necessarily prevent future violations. We can just look south to see the possible consequences of trying to fix a mistake instead of preventing it.

The eastern half of the country can breathe easier; President Obama proposed new air-quality rules under a federal court order.  These regulations will reduce soot and smog emissions from coal-fired power plants through the installation of scrubbers and other technologies, and replace faulty rules passed by President Bush that were based on flawed scientific conclusions. Although it is expected to cost $2.8 billion annually, these new rules will save an estimated $120 billion in health costs every year.
The EU is also passing laws to clean its air.  By 2016, all major polluters in the EU will have to limit their emissions of sulfur dioxide, dust and nitrogen oxides, while power plants relying on coal or oil have until 2020 to comply (or, as a previous blog mentioned, these power plants do not have to change anything as long as they will be shut down by 2023).
So will this wave of stringent air pollution regulations lead to a comprehensive federal management system of greenhouse gas emissions? With the EPA starting to crack down on industrial emissions and State Implementation Plans under the Clean Air Act, maybe regulations of carbon emissions is (hopefully) not too far off.

On Tuesday, May 18, the EPA announced in the final version of its “Tailoring Rule,” a modification to the Clean Air Act to accommodate the regulation of greenhouse gas emissions, that biomass is no longer considered a carbon neutral source of energy.
Obtaining energy from biomass usually requires the incineration of plant matter.  The process has often been considered in the past to have zero net carbon emissions because the combustion does not release many compounds besides CO2, which can easily be reincorporated into new vegetation. However, the planting, harvesting and maintenance of any sustainable biomass project do emit carbon, so a more appropriate name would be ‘low carbon fuel.’ Furthermore, the US Department of Energy ranks biomass fuel 18th in terms of environmental cleanliness, with 0.0885 metric tons CO2e emitted for every million BTU consumed.  That’s more than the zero tons CO2e per million BTU emitted through traditional renewable energy sources, such as wind and solar energy, as well as the 0.0531 per unit of natural gas and 0.0732 from diesel fuel.
Although the EPA’s decision comes as a shock to some industries and may push current biomass users to switch to fossil fuels for higher efficiency, the fact that biomass produces so much CO2 makes the recent lack of exemption from CO2e permitting requirements not unreasonable.

With Republican Senator Lindsey Graham off the new American Power Act, just presented by Senators Kerry and Lieberman, and the need for 60 supporters to make it filibuster-proof, it’s hard to say whether it will pass.

The bill is not particularly satisfying for environmentalists or energy companies.  Pledges to fund clean coal technology and natural gas show governmental support for something very far from renewable energy sources. Support for offshore oil and gas drilling is featured despite the recent disaster in the Gulf of Mexico, although a draft of the bill calls for impact studies before leasing (hopefully along the lines of the more stringent Environmental Impact Study under NEPA, instead of the lax Environmental Assessment). However, support for voluntary renewable energy markets and research into electric transportation, as well as commitments to improving efficiency and expanding nuclear energy, are promising steps.

The American Power Act also features cap and trade for CO2e emissions, which include carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, perfluorocarbons, and nitrogen trifluoride, and will be regulated by the EPA. However, there is a cap and floor for the price of CO2e. This will definitely affect trading and markets.

The bill states steep emissions reduction goals with a 2005 baseline: 17% by 2020 and 83% by 2050. As Andrew Revkin of the New York Times states, this long term goal “is in the realm of fantasy baseball so is not worth pondering.”

Read a section-by-section summary here, or the entire bill here.

Recently, the federal government has provided incentives for individuals to go green: for example, the tax rebate for energy efficient appliances or the 30% tax credit on private home installation of solar panels. But given the  economy, there have been portions of both federal and state budgets dedicated to helping make businesses greener, too.
For example, the EPA provides rewards to small companies that provide cutting-edge R&D and runs the Energy Star for Small Businesses program, which facilitates remodeling and maximization of energy and cost savings. The federal government also provides tax deductions for energy savings by real estate developers and business owners who invest in smart energy grid equipment.
Additionally, non-profit organizations like Georgia Green Loans and the majority of state energy departments provide loans or grants to allow for the greening of local businesses. So despite some dissenting voices saying that the environment should take a back seat to the economy right now, the government is providing the means for businesses to take care of the earth and their bottom line.

Calpine is going where no power company has gone before by initiating the first power plant that will be more efficient than proposed GHG emission reduction criteria at both the federal level and at those of California cap-and-trade regulations set to go active Jan 1, 2012. Construction is set to begin next year on the 600-megawatt natural gas-fired plant. The Russell City Energy Center, spanning 15-acres, will reside just east of the San Francisco Bay.

With the EPA moving toward GHG regulation from large emitters under the Clean Air Act, and cap-and-trade on the horizon, Calpine is taking the lead by developing in a direction makes them both more ecologically as well as economically sustainable. Calpine is already one of the worlds largest geothermal producers, and by advancing gas-fired power generation that produces GHG emissions at less than 50% that of coal-fired power plants, they are poised to be the company that helps California achieve it’s energy needs for the future and leads the way for power providers nationally.

The Russell City plant will handle base load power demand, but Calpine is promoting use that is supplementary to other cleaner and more renewable technologies as they evolve and roll out. Pacific Gas and Electric Company, the purchaser of the electricity, will have the option of balancing and dispatching from all energy sources and using the gas-fired plant when solar and wind cannot meet demand or are unavailable.  Sierra Club chief climate counsel David Bookbinder said “Calpine is leading the way and showing how it’s possible to generate all the electricity that America needs with half the greenhouse gases.” Linda Adams, secretary of the California EPA commended, “We applaud the BAAQMD and Calpine for going beyond existing federal law and being the first in the nation to require an enforceable greenhouse gas limit.”

Despite the turbulent energy environment, it is not surprising that Calpine is being discussed as a top stock pick.

In 2004, Peter Cartwright, founder and CEO of Calpine, earned recognition as a Business Leader of the Year by Scientific American. They noted the companies outstanding environmental record, dramatically lower emissions relative to the rest of the industry, and a stated commitment to cut those emissions even further for all future developments. The company was also recognized for their use of combined-cycle technology that captures energy that is wasted in the single cycle systems that currently predominate.

Then in 2005, they became the first independent power producer to achieve the distinction of Climate Action Leader and voluntarily disclose GHG emission information to the public. In the press release, Neal Pospisil, Calpine’s vice president of safety, health and environment stated: “Being at the forefront of environmental accountability is a priority for Calpine and taking inventory of our carbon emissions profile is one of the first steps in finding new ways to manage our carbon dioxide emissions…Having a third party certifying that inventory further ensures that Calpine’s reporting meets objective, uniform standards.”

Calpines steady efforts and climb to leadership shows that it really pays off to find out where you are and take a good look around so that you can move confidently to where you want to go.

We had a meeting with a client in South Carolina Friday. Then I met with the Chicago Climate Exchange Monday. It is interesting how these two disparate groups are saying the same thing. Both see the logic in cap and trade versus command and control. Neither wants the EPA to manage the process (and in my opinion the EPA does not want to either). Both believe a cap-and-trade bill is going to occur in the first quarter of next year.  Both recognize that there needs to be a fundamental change to how we look at our inputs; whether it is oil, gas, or electricity.

The CCX is focused on trading environmental instruments. The amazing thing about the CCX is that they have contracts for the voluntary emissions reductions (CFI’s), Regional Greenhouse Gas Initiative (RGGI) credits, California Climate Action Registry (CCAR) credits, Renewable Energy Certificates (RECs),  and when issued credits under eventual legislation. This doesn’t even include the trading of emissions under the European scheme, which is done by the ECX. The exchange only creates contracts because they know they can make a market. So our friends in South Carolina are not the only ones recognizing the eventuality of a market.

The CCX is currently running a “special” - it normally costs $0.15 per metric ton to register a project on the exchange - however, they lowered the price to $0.05. This has led to increased registration of offset projects. Further, the current legislation includes all the offset project types that the CCX has allowed. Now, it is unclear whether the protocol will match those of the CCX (probably will be similar but technically different) The difference will be that of measurement not acceptance. So a project under the CCX may create 1,000 metric tons of offset could create 1,100 (or 900) metric tons under an eventual protocol.

The reason we work with the exchange is threefold:

1) We recognize that an exchange will lead to the most efficient clearing price

2) Forward thinkers can manage their future risks using futures, options and bankable credits

3) No matter how the eventual carbon markets come out the CCX contracts are written to adjust to them.

If your business is carbon intensive, beginning calendar-year 2010, chances are you will have to measure and report your greenhouse gas emissions to the Environmental Protection Agency (EPA). There are a number of rules that apply, the most important being that if your company emits at least 25,000 metric tons of CO2 equivalents annually. The new law, which is called the Mandatory Reporting Rule (MRR), will require more than 13,000 businesses to report their carbon emissions by March 2011. However, you must start collecting information starting January 2010.

So, how do you know if you meet this threshold?

If you generate any of your own power, are in metals production or utilize boilers, you’ll most likely be affected by the law. In total, there are 26 different source categories—mostly manufacturing or production companies.

The bad news is that if you don’t report or don’t report correctly, MRR falls under the Clean Air Act and you may be subject to administrative, civil and criminal penalties. That means jail time and five-figure daily fines. The good news is there are consultants already in place to make sure you are prepared and all of your paperwork is in order.

For a small fee you can hire Atlanta-based Verus Carbon Neutral to tell you if you’ll need to report or not. Verus can help you measure and begin reporting. Click on this link or call 800-275-1847, for free, to see if your business falls into one of the 26 categories.

The big question: Why is the EPA requiring companies to report their emissions? It all has to do with the government wanting short and long-term greenhouse gas reductions. The Obama Administration is using a “carrot and stick” approach. The “carrot” is cap and trade and the “stick” is the EPA. So if a cap- and-trade bill doesn’t get passed it’s very likely that greenhouse gases will be regulated by the EPA as part of the Clean Air Act. Then companies will face heavy fines for non-compliance.

The Obama Administration has already issued Executive Order 13514, which requires the entire the federal government to measure and reduce its carbon footprint. Even parts of the military are affected by this order. So it’s clear that President Obama is serious about reducing the county’s carbon footprint. You probably already know that the U.S. House has passed the Waxman-Markey Bill, but the Kerry-Boxer Bill, in the Senate, is still being considered. Reliable resources indicate that there are 24 Senators that are “on the fence,” and if 11 of them vote “yes” on the bill it will pass. Both cap-and-trade bills will ease CO2 emitters into reductions the first few years with the use of allowances, which will be, at first, given away and then sold to companies that can’t make reductions. Companies that can make significant reductions will be in the catbird seat, and will be able to sell their reductions as offsets.