Threshold Crossed

Threshold Crossed

July 01, 2009

Ken Silverstein
EnergyBiz Insider
Editor-in-Chief
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It's more than a milestone. It's a clear message to the American people. By passing a comprehensive energy bill that includes carbon caps out of the U.S. House of Representatives by a vote of 219 to 212, President Obama has a crossed a threshold never achieved before -- one that sets out to change American energy policy.

For the last several years such a concept has languished in the halls of Congress and often outside the doors of those most in tune with environmental organizations. That's why the president can boast a victory even if the measure were to stall in the U.S. Senate.

"President Obama, however, will be able to claim that the nation has reversed the course of the prior administration by passing a bill in the House," says Christine Tezak, a senior energy and environmental policy analyst for Robert W. Baird & Co., Inc. "This appears to have been the administration's goal."

Under the bill, greenhouse gases must be trimmed by 17 percent from 2005 levels and all by 2020. Utilities must also generate 15 percent of generation from renewable energy sources by 2020. Energy efficiency gains of 8 percent are required, too, by the same time. The overall goal is to cut carbon dioxide emissions by 80 percent by 2050.

And while the Democrats dominate the Senate, any measure must still win 60 votes to sustain a filibuster there. Therefore, it will be the moderate lawmakers as well as those from rural areas that control the ultimate outcome of the bill. In coal country, for example, even the Democrats are naysayers.

The basis of those concerns is whether global warming is man-made. Skeptics are becoming increasingly vocal that the current warming trends are the result of natural weather patterns and not carbon emissions from power plants and automobiles. Not only is such legislation not necessary, they claim, but it is also expensive. Its costs would be borne by consumers.

But proponents of the measure say that those concerns are overblown. They say that the money earned from selling carbon allowances would be split between the development of new technologies and with customers, who would be guaranteed stable rates. The Congressional Budget Office estimates that the bill would have an average annual cost of $175 per household by 2020. The Environmental Protection Agency projects that the bill would cost American households $80 to $111 a year.

Financial Risks

Households are one segment. Businesses are another. An analysis by the Investor Responsibility Research Center Institute and Trucost concludes that the earnings of most companies would be relatively unaffected by the passing of pending carbon legislation. A few of them, however, could see much higher operational costs as a result.

The utilities sector is the most carbon intensive, they say, emitting about 59 percent of greenhouse gases from companies that are in the Standard & Poor's 500. It therefore faces the highest financial exposure to carbon costs. If the 34 utilities analyzed in the study were to pay for each metric ton of emissions, carbon costs could reduce their combined earnings by 45 percent, the study says.

The financial risk varies. The examination finds that earnings could drop anywhere from 1 percent to as much as 117 percent if carbon costs are incurred. Within the S&P 500, it says that 203 of them would experience 1 percent hits while 71 would see earnings fall by 10 percent or more. The greatest variation is in the most carbon-intensive sectors -- a risk that is currently not reflected in companies' financial statements but one that would be if carbon constraints become real.

"The cost of carbon emissions has been passed to the public and not reflected in the financial statements of companies," says Jon Lukomnik, a director of the institute, which commissioned the study. "The analysis makes clear that a cap-and-trade system is a real game changer. A number of companies will have to reform how they think about carbon emissions and the associated costs, or their bottom line will suffer greatly."

He goes to say that companies could be caught off guard if they do not understand the complex nature of the bill that might ultimately become law. In fact, Lukomnik says that two-thirds of the S&P 500 has inadequate greenhouse gas emission disclosures. Simon Thomas, chief executive of Trucost, adds that companies must begin immediately to measure and reduce their carbon emissions if they are to thrive in the new environment.

Consider American Electric Power, which has one of the nation's largest coal-fired fleets: Its chief executive, Michael Morris, is saying that mandatory greenhouse gas reductions could put a significant strain on the economy. But if the policy is implemented alongside others that help facilitate the advancement of new technologies into the market, it will work without hampering economic growth. Among the ideas: carbon capture and sequestration, which his utility is now testing and which will get federal funds.

The energy measure's aim is to raise the cost of fossil fuels and thereby encourage the development of more renewable energy. But if the ultimate proposal is to win over lawmakers from the nation's coal regions, it must satisfy their concerns. Given that they now hold the most sway, more concessions may be forthcoming. That may serve to dilute the president's aspirations, but an all-out victory nonetheless will still allow him to boast that the country has entered a new era.