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Jim Rogers
  James Rogers
 

Gazing Through the Carbon Haze

9/25/2009 --

Ross Energy Club's annual Carbon Symposium demystifies cap-and-trade legislation and highlights multidisciplinary opportunities in the new carbon economy.

ANN ARBOR, Mich. — The healthcare debate may dominate the headlines right now, but the business world is setting up for what could be an even bigger transformation: the move to regulate carbon emissions.

A bill sponsored by U.S. Reps. Al Waxman and Ed Markey already has passed the House of Representatives and would set up a system in the United States in which total emissions would be capped, companies could buy allowances to emit carbon, and credits to offset emissions could be traded on the open market.

But there's still work to be done in the Senate and plenty of dots to connect before the full picture emerges. Meanwhile, world leaders are readying for a global climate summit in Copenhagen, Denmark, and there's wide disagreement on how to shape regulations.

Business doesn't have the luxury of waiting to see what happens. Companies are making plans for cap and trade with some firms voluntarily curbing emissions and trading credits. The shift affects everything from corporate strategy, finance, and manufacturing to public policy, science, and entrepreneurship.

The Ross Energy Club's second annual Carbon Symposium Sept. 18 shed some light on the challenges and business opportunities as nations grapple with how to meet increasing demands for energy along with the pressure to curb emissions.

The conference drew experts and observers from a wide array of companies and disciplines, including big coal-consuming utilities, carbon credit creators and buyers, oil companies, financiers, and innovators.

"Clearly, this is a business issue that cannot be avoided," said Tom Lyon, Dow Professor of Sustainable Science, Technology, and Commerce at Ross. He also is director of the Erb Institute for Global Sustainable Enterprise.

Power Play

James Rogers, chairman and CEO of Duke Energy, helped set the tone with a keynote address in which he called for the U.S. government to act soon on new carbon regulations. He outlined innovative ways his company is seeking to meet power demand and cut emissions.

Rogers has been at the forefront in the utility industry in supporting some sort of cap-and-trade system. He has been leading efforts to find workable alternatives to burning fossil fuel. About 70 percent of Duke's electricity is generated from coal-fired plants, but the company also uses nuclear, wind, solar, and hydroelectric power.

Putting a price on carbon "turns loose the imagination and creativity" of people as they try to comply and will give utilities a good idea of their capital costs down the road as they build the next generation of power plants, he noted.

"I want action today," Rogers said. "I want the roadmap. I want the rules, because when I build a power plant, it's going to be there for 50 years, 60 years. By 2050, virtually every power plant will be retired and replaced. That's liberating. It's like a blank sheet of paper."

In the meantime, Duke is taking steps to find new, renewable sources of power and improve the efficiency of existing plants. The company has entered a cooperation agreement with a Chinese company on clean coal and renewable energy projects, and plans to announce more deals. Rogers said China and the U.S. both share a dependency on coal and should join together to tackle the carbon problem.

Duke also is looking at ways to move "beyond the meter" by cycling power within homes using a computer algorithm. The idea is that when a customer turns on a dishwasher, some power is borrowed from another appliance. A test run in a neighborhood showed a 10 percent reduction in energy and customers didn't notice any difference.

The trick with legislation is to keep power affordable while helping to fund new technology, Rogers said. Setting too high a price on carbon would drastically drive up utility bills for customers. So while cap and trade is needed, the price required to stimulate the necessary technology would be politically unfeasible. That's why Rogers called for "complementary policies," such as public-private ventures, to fund a technology roadmap.

The Primordial Soup

Utilities aren't the only ones looking ahead. The U.S. carbon credits market is voluntary but there are buyers and sellers. That begs the question as to why someone would spend money when it's not required.

There are different motivations. Some are "pure" motivations, as companies have voluntary goals to become carbon-neutral, said Adam Raphaely, director of green markets at TFS Energy. It can also help the company differentiate its product from competitors.

Others expect the credits bought in the voluntary market to carry over when carbon emissions are legally regulated. Thus, a company that expects to emit carbon can buy offsets for a low price now, or so they hope.

"We're seeing both kinds of buyers sitting alongside each other," Raphaely said.

In other cases, creating an offset can be profitable. Gabriel Thoumi, MBA/MS '08, is project developer for Forest Carbon Offsets LLC and said that landowners can earn a higher return by not cutting trees and putting offsets on the market.

"From where we're sitting right now (in forestry), it's profitable," he said.

But since the market is voluntary, there's some concern about the quality of the offsets and the ability to verify them. Carpet manufacturer Interface Inc. has set a goal of zero carbon emissions by 2020. It's doing that by reducing its own carbon use and creating carbon-neutral products. Creating the carbon-neutral products involves buying offsets, and Interface goes through a long, thorough process to verify the quality of the offsets it buys.

"We started buying (offsets) in 2003 and what was hard was getting a level of quality," said Erin Meezan, VP of sustainability for Interface. "We had to do tons of due diligence. It's easier now, but the standards are changing. The voluntary carbon standards took longer to get launched and into the market than people thought it would."

Investors who put money into projects using carbon offsets have to understand that market and plan for that risk, said Jay McKenna, VP of C-Quest Capital, a carbon finance firm. Both companies and finance firms will have to understand what they're buying and how to buy for the right use. For example, a large utility will want to buy for the long term and not keep picking up credits on the spot market. The developer of a project has to understand how to manage the sale in the future.

There's going to be a need for that expertise once a structured cap-and-trade market is established in the U.S., McKenna said. "The focus is to think about how liquidity gets put into that market. Somebody's got to put together the contracts and figure out the way capital actually gets put into those projects."

While cap and trade seems to be the favored blueprint by both Congress and the Obama administration, ExxonMobil and others are still calling for a simple tax on carbon. But Randy Armstrong, environmental issues director at Shell Oil Co., said his company prefers cap-and-trade.

"Who wants to tell me what the price is for the tax we would need to fund the innovation we need?" he said. "What if we guess wrong?"

I'm Just A Bill

In the near future, policy will get most of the attention. The current Waxman-Markey bill has to work its way through the Senate and Duke's Rogers said he expects a more "centrist" bill to emerge. There are still issues to work out, including whether the government should allocate or auction off carbon emission allowances. Blake Richards, director of carbon trading at DTE Carbon LLC, said he'd like to see fewer restrictions on the number of offsets than in the latest version of the Waxman-Markey bill.

Congress might not pass a climate regulation bill until 2010. Meanwhile, the Climate Conference in Copenhagen takes place in December. The Kyoto Protocols, of which the U.S. is not a part, expire in 2012.

Rogers said that in an ideal world, the U.S. would have its policy in place before then, with some bi-lateral agreements with China. But movement in talks between all nations has been slow, though Rogers said there's been some progress.

"I'm hopeful that we really advance the ball in Copenhagen," he said. "I don't think we can entirely cross the goal line, unfortunately."

—Terry Kosdrosky

For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu