Ken Silverstein EnergyBiz Insider Editor-in-Chief

"2006 is the year climate change moved from the controversial to the conventional," says Swami Venkataraman from the Standard & Poor's utility team. "Industry accepts this. Requiring large reductions early on and before the technology is developed could be harmful to credit quality. Reductions over a longer period will have a better result."

In a teleconference on the subject of climate change and credit risks, the analyst goes on to say that regulated utilities will focus mainly on how to recover the costs associated with compliance of these laws while unregulated power generators will be more exposed. He emphasizes that the technologies to capture and store CO2 are in the nascent stages and that the cost of compliance with any new regulations remains uncertain.

S&P points to a study by the U.S. Department of Treasury saying that the eventual impact on gross domestic product would be 5 percent while the cost of remediation would be one percent. Other predictions say that capital that would flow into the new technologies could increase world output by 5 percent.

In the United States, the Energy Information Administration is projecting a 66 percent increase in coal-based power production and a 43 percent increase in CO2 emissions by 2030 if no pollution controls on such releases are required. The overall stated goal is to cut those CO2 emissions by 50 percent by 2050.

And while there is much disagreement over how this is to be achieved, the mechanism most bandied about is a cap-and-trade system whereby the U.S. government would set limits on emissions and then auction credits to companies. If companies are unable to meet the limitations, they could use their credits so that they could pollute more. If they are able to get there, they could bank or sell those credits to others unable to do so. The price of those credits would subsequently be factored into the price of power, which would potentially make coal more expensive than other fuel forms.

Resolve Exists

The resolve exists to not only create the technologies to make carbon reductions possible but also to develop a regulatory structure that facilitates change. The Carbon Sequestration Program, managed by the Energy Department's Office of Fossil Energy, aims to develop fossil fuel conversion systems that offer 90 percent CO2 capture, with 99 percent storage permanence. It says that the goal is to ensure that the process does not add any more than 10 percent to the price of energy services.

Meantime, the United States is eager to create a trading scheme that drives down emission levels and motivates the development of modern tools and equipment. The European Union has been roundly criticized because of the way it freely doled out emissions credits. That particular method created an additional cost for consumers while boosting profitability in the power sector. Companies factored into their price of power the free allowances, even though they didn't pay for 90 percent of them.

The reasoning behind handing out free credits is to ease the cost of compliance as well as jumpstart the CO2 trading sector. But the National Commission on Energy Policy that is made up of industry, environmentalists and scholars recently suggested that this country adopt a policy whereby half of the initial credits would be auctioned and subsequently used to pay for clean energy technologies. That also appears to be the stance of 10 Northeastern states and of California, all of which have crafted laws to cut CO2 levels.

"Over the long term, this has the potential to make coal fired generation less competitive," says Peter Kernan, part of S&P's utility team. "Carbon capture then becomes very important" to the future of coal-fired power plants that are said to contribute a third of all CO2 emissions in the United States.

To be sure, the global warming debate has plenty of skeptics who warn of millions of lost jobs over a phenomenon that is naturally occurring. They question why the U.S. Senate, which has twice voted down cap-and-trade legislation, would undertake a process that is both expensive and unproven.

They particularly decry any discussion of taxing excessive carbon emissions, saying that neither lawmakers nor industry favor this approach. The passage of any legislation may make people feel good, they add, but question its possibilities. Without the technology, skeptics say that the cost of power would rise while emission levels would fail to drop.

"The stark reality is that if we really want to alter the warming trajectory of the planet significantly, we have to cut emissions by an extremely large amount, and -- a truth that everyone must know -- we simply do not have the technology to do so," writes Cato senior fellow Patrick Michaels. "We would fritter away billions in precious investment capital in a futile attempt to curtail warming."

Despite the passionate pleas by those who argue against a headfirst approach, the global community is on an unyielding mission to curb CO2 emission levels. Proponents of immediate action say that the cost of doing nothing would be environmentally devastating while adding that new regulations would be economically beneficially by spawning new jobs associated with the creation of pollution control technologies.

Change is likely. Most of the scientific community says that the threats are real while the U.S. Congress is becoming increasingly sympathetic to the cause. The American business community, meantime, knows carbon controls are coming. Their objective now is to work with lawmakers to influence the future of any new laws.

More information on this topic is available from Energy Central:

Responding to Climate Change, EnergyBiz, May/June 2007

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