The New Carbon Cycle

7-Steps for Determining Climate Change Legislation's Impact on Your Business

Climate change legislation and cap-and-trade proposals have created significant concerns with respect to potential risks that companies are facing.   We can call these “Carbon Liabilities.” What many leading-edge companies are beginning to discover is the potential for opportunities in a cap-and-trade environment.  We can call these “Carbon Assets.”  For companies with greenhouse gas (“GHG”) emissions, identifying and evaluating Carbon Liabilities and Carbon Assets is a critical step in preparing for future climate change legislation.

Federal law as soon as next year will require companies to measure and report their greenhouse gas emissions to EPA.  The House has passed a climate change bill, and the Senate will be considering and voting on a climate change bill as early as this fall.  If it passes, emitters of greenhouse gases, depending on the industry they are, in may be required to reduce their greenhouse gas emissions.  Almost half the state have adopted or are working on adopting climate change legislatio.  Thus, whatever Congress does, many states will impose their own restrictions on GHG emissions.

In a cap-and-trade program, companies may purchase GHG or “carbon” permits, sometimes called allowances or offsets to meet their regulatory requirements in lieu of reducing their emissions.  In addition, under a cap-and-trade system, at the end of each year, either carbon allowances or offsets must be turned in for every ton of GHGs emitted by a facility during the prior year.

The challenge for companies looking forward is to understand how these regulatory requirements may effect them.  The following 7-Steps provide a guide to how to address these issues:

Step One:  Measure your GHG emissions or “Carbon Footprint” in accordance with existing state and proposed federal GHG reporting requirements.

Step Two:  Evaluate existing and proposed state and federal climate change laws and regulations that may affect your business operations.

Step Three:  Determine if your company will be required to incur costs to reduce GHG emissions or purchase carbon allowances or offsets.  What are the Carbon Liabilities? 

Step Four:  Determine what GHG emissions will not be regulated.  For those emissions, evaluate whether reductions can be monetized and sold as carbon credits or retained to use for the companies own compliance requirements with a reasonable rate of return on investment.  What are the companies Carbon Assets?

Step Five:  Develop a form of Carbon Ledger so that the company can develop a Carbon Accounting of its Assets and Liabilities, and analyze different ways of managing those Liabilities and taking advantage of its Assets.  A program to track and analyze these Assets and Liabilities on a weekly, monthly, or at least annual may need to be developed.  A carbon trading desk within the company or outsourced to a carbon broker may be appropriate.

Step Six:  Engage management on climate change regulatory issues and present the companies GHG emissions, Carbon Assets, and Carbon Liabilities.

Step 7:  Develop a Climate Change Strategy to reduce Carbon Liabilities and to develop and produce revenue or reduce costs using Carbon Assets.

This 7-Step Process is the general approach companies should be considering to address the potential risks and opportunities that may arise as a result of current and developing state and federal climate change legislation.

Senate Introduces Bill to Promote Natural Gas in Vehicles

On July 8, 2009, a new bill to promote the use of natural gas in vehicles was introduced in the U.S. Senate by Robert Menendez (D-NJ) and co-sponsored by Majority Leader Harry Reid (D-NV) and Senators Orrin Hatch (R-UT).   The New  Advanced Transportation to Give Americans Solutions Act (the NAT GAS Act), introduced by Menendez and co-sponsored by Reid and Hatch, would extend and increase tax credits for natural gas vehicles and refueling stations.  A companion bill was introduced in the House of Representatives in April 2009 by Congressmen John Larson (D-CN), Dan Boren (D-OK) and John Sullivan (R-OK).

The NAT GAS Act would accomplish the following:

• Expand and modify the alternative fueled vehicle and refueling property tax credits as follows:
  • Make all dedicated natural gas-fueled vehicles eligible for a credit equal to 80% of the vehicle’s incremental cost. Only some dedicated natural gas vehicles currently can qualify for an 80% federal tax credit.
  •  Make all bi-fuel natural gas-fueled vehicles eligible for a credit equal to 50% of the vehicle’s incremental cost. This is the first time bi-fuel vehicles would be eligible for a federal tax credit.
• Increase the allowable incremental cost limits to more accurately reflect the cost of producing or converting natural gas vehicles:
  • For light-duty vehicle, the purchase tax credit cap would be increased by to $12,500 (currently $5,000).
  •  For all other vehicle weight classes, the purchase tax credit cap would be doubled.
• Increase the refueling property tax credit from $50,000 to $100,000 per station
• Allow the natural gas vehicle and natural gas fueling infrastructure credits to be transferred by the taxpayer back to the seller or to the lessor
• Allow state and local governmental entities to issue tax exempt bonds in order to finance natural gas vehicle projects
• Allow 100% of the cost of a natural gas vehicle manufacturing facility that is placed in service before January 1, 2015 to be expensed and to be treated as a deduction in the taxable year in which the facility was placed in service.

The bill would create new markets for natural gas in the United States, and take advantage of the new discoveries in this country and the abundant natural gas reserves they contain.  Switching from diesel or gasoline to natural gas also reduces the emission of greenhouse gases.  These emission reductions can be monetized in the form of carbon credits (as a voluntary credit today, and potentially a compliance credit in the future), providing another incentive and revenue stream to move vehicles to the use of natural gas as a transportation fuel.