Like it or not, greenhouse gas emission regulations are coming.

AuthorMathews, Mark
PositionGUEST [column] - Column

Congress is currently working on legislation that will establish a cap-and-trade program to slowly decrease the amount of greenhouse gases that are emitted in the U.S.

Think it won't impact your business? Think again.

If a company is not thinking today about how its business is going to be affected by the cap-and-trade program or how it will participate in the carbon market when the regulations are finalized, then it could be at a disadvantage when legislation passes. A clear understanding of the proposed cap-and-trade program may be critical to the future success of your business.

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A cap-and-trade system is a market-driven regulatory approach that allows regulated sources to employ the most cost-effective means to meet decreased emission requirements. The program Congress is developing establishes a nationwide cap on emissions that slowly decreases over time. Each regulated emission source must have sufficient allowances granted under the legislation to cover each ton of its emissions in a given year. So, if a company emits 500 tons of greenhouse gases in a given year, it must submit to the government 500 allowances at the end of that year.

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What happens if a company doesn't have sufficient allowances to cover its emissions? Companies can purchase or trade with other sources in the carbon market to acquire the allowances it needs to cover its emissions. Allowances can also be saved up in the "bank" for use in future years. To do this effectively, companies must plan ahead.

Some companies in particular economic sectors -electricity providers, home heating oil providers and certain trade-vulnerable industries, such as aluminum manufacturers and cement companies--will receive free emission allowances for the initial years of the program. However, these will eventually cease, and companies in these industries must still be prepared to acclimate to the new regulations.

Allowances are also provided to support various initiatives, such as the development of carbon capture and sequestration technologies. While a small number of allowances will be available via government auction during the initial years of the program, eventually the distribution of free allowances will cease, being replaced entirely by auction. Competition for these allowances will be fierce, not to mention the high price tag attached to the remaining allowances.

As a result of the founded concerns about allowance costs and potential...

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