The U.S. Senate Finance Committee will hear testimony today regarding the international aspects of a climate change cap and trade program.
Point Carbon, an independent consulting firm for governments and companies in the global power, gas and carbon markets, is scheduled to present its analysis of the current version of the U.S. Senate’s Lieberman-Warner Climate Security Act (CSA).
Point Carbon said in a recent report that passage of the CSA would create the largest cap-and-trade emissions trading system in the world with an allocation of 5.7 billion emissions allowances in 2012–a market value equivalent of $150 billion.
"A U.S. market of nearly 6 billion emissions allowances is more than two and half times greater than the current European Union Emissions Trading Scheme (EU ETS). The potential in a market of this size for both domestic and international parties is tremendous," said Kjell Olav Kristiansen, Director of Advisory Services, Point Carbon North America.
The CSA, introduced in October 2007, is expected to be the basis for a future federal US emission trading scheme (US ETS) and sets a greenhouse gas emissions target that is 70% below 2005 levels by 2050. Achieving that target will require a fundamental restructuring of the US economy and how it produces and uses energy, Point Carbon said.
According to Point Carbon the CSA initially placed most of the regulatory burden on the actual emitters, but the newer version of the bill shifts more of the regulatory responsibility upstream to fossil fuel producers, processors and importers within the economy. Point Carbon said the result would be similar to a fuel tax.
The Point Carbon report said, in the initial phase of a cap-and-trade system, companies most likely will switch to natural gas and purchase offsets to reduce emissions. It states a shortage in domestic offsets will create a strong demand for EU and other international carbon allowances, creating an incentive for international trading systems that could supply foreign allowances to the US market and subsequently strong motivation for the US to contribute to a new international post-2012 agreement to secure a flow of international allowances.
"While domestic initiatives will cover some of the reductions, the U.S. will not be able to cover everything alone. This means strong incentive for international cooperation and U.S. participation in a post-2012 agreement," noted Mr. Kristiansen.
Additional highlights of the report include:
During the first year of operation, 3 to 4 billion allowances would have to be purchased in the U.S. market for the emitters to meet their compliance obligations. Total traded volumes are more likely to be in the range of 4 to 5 billion tons.
Transportation fuel refiners and importers will become the largest purchasers of carbon allowances, needing approximately 2 billion allowances per year beginning in 2012.
Under the revised bill, natural gas fired power plants no longer benefit from the allowance allocation. Natural gas power generation facilities, which would have seen an increased competitive advantage under the initial draft of the CSA, will see higher feedstock prices under the latest draft.
So-called "process" emissions in the industrial sector such as the carbon dioxide emissions associated with cement, iron or steel production, are left out of the most recent version of the bill.
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