Preparing for change.

• Author: Arnold, Matt
• Position: LEGISLATION

Though it's too early to predict exactly what will come out of Washington, D.C., it's not too soon to prepare--especially since it's expected that changes are coming. Recent economic, legislative and regulatory developments have set the stage for the most comprehensive response to date from the United States government on a range of energy and climate-change issues.

And, though the challenge of designing a comprehensive regulatory response is significant, the investment in addressing the challenge is important and the new administration has stressed action.

For companies operating in the U.S., a strong response from Washington could create an environment where financial executives have more reliable information to assess climate-related risks and quantify material impacts. But the size and complexity of current proposals are unprecedented. That means a working knowledge of the direction Washington is headed is important, no matter what business you are in.

First, climate and energy policies must work together to meet the range of objectives on economic growth, national energy security, climate change and local air pollution standards set by the new administration. Not only would many current standards need to change for energy and fuel use, but the cost of emitting greenhouse gases and the incentives for energy efficiency would need to change too.

Among the recent announcements on changing standards, notable are fuel economy standards for new passenger cars and light trucks. In May, the U.S. Environmental Protection Agency and the National Highway Traffic Safety Administration agreed to set fuel economy standards to 35.5 miles per gallon by model year 2016. Other significant standards are under consideration in congressional committees including a national renewable energy standard (RES), which would require utilities to supply a portion of their electricity from renewable sources.

The largest programs under consideration, however, will either directly tax heavy-emitters of greenhouse gases or provide them a limited amount of emissions allowances that could be either held or traded under a cap-and-trade system. Under such a system, emissions targets would be progressively cut and the number of allowances would diminish, leaving anyone who has not reduced emissions short of pollution allowances and facing significant costs.

Regardless of the ultimate policy design, however, the fact remains, if greenhouse gas emissions are regulated at the federal level those emissions will have monetary value. In turn, the impacts to...