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April 17, 2009

Deloitte Details Risks in North American Carbon Markets

As supply and demand for North American carbon credits develops, businesses need to react accordingly to these emerging U.S., Canadian, and cross-border carbon markets, according to the latest white paper from Deloitte LLP.

The whitepaper, “Confronting the Carbon Challenge: Business Implications of the Developing North American Carbon Markets,” provides an overview of implications of a cap-and-trade market in North America, which can have a significant impact on businesses.

These issues range from carbon as a new commodity and carbon pricing impacts on contracting in capital allocation decisions to tax and financial statement implications. There are a host of other issues that businesses need to react to as well including reporting and disclosure, implication on companies not regulated by the carbon trading market and fraud risk related to carbon. All these issues and more are covered in the whitepaper.

Here’s how the North American carbon market looks today. In the U.S., a carbon cap-and-trade system in the United States is under development, which includes $80 billion per year of revenue from government sales of carbon credits, said Pat Concessi, Deloitte’s global leader, Climate Change and Sustainable Resources, author of the whitepaper. The national climate legislation could cut greenhouse gas emissions 20 percent from 2005 levels by 2020, and establish a cap-and-trade system for carbon dioxide and national standards for renewable energy.

The key issues of debate for a U.S. cap-and-trade program include magnitude of targeted reductions, speed of targeted reductions, included industries, eligible offset types and quantities, and point of regulation, as well as the role of broader clean-energy measures, according to Concessi.

In addition, she noted that the various legislative efforts have proposed a host of regulators to police the markets — the Environmental Protection Agency (EPA), the Federal Energy Regulatory Commission, the United States Department of Agriculture, the Commodity Futures Trading Commission and a newly created agency that is specific to carbon markets.

On the regulatory side, the Supreme Court’s April 2007 decision in Massachusetts versus EPA gave the environmental agency authority to regulate carbon dioxide (CO2) as a pollutant under the Clean Air Act. On March 10, 2009, the EPA released a proposed mandatory greenhouse gas (GHG) reporting rule, which will require annual reporting of GHG emissions from 13,200 facilities, beginning in 2010, into a national database.

This was followed in April by the EPA’s release of its “endangerment” finding that greenhouse gas emissions threaten the public. These two actions set the stage for a more robust, direct regulation of greenhouse gases, although it remains to be seen how this regulation will intersect with legislative efforts, said Concessi.

Concessi also said another factor impacting the carbon market in the U.S. is the “patchwork quilt” of carbon trading programs at the state and regional levels, including the Regional Greenhouse Gas Initiative (RGGI) in the Northeast, which began trading in January 2009, and the emerging WCI, which spans the Western United States and Western Canada. However, regional carbon markets in the U.S. may join forces before the launch of a federal greenhouse gas legislation.

Canada and Mexico also have plans to establish their own carbon trading markets.  In March 2007, the Canadian federal government outlined its plan for a cap-and-trade scheme. However, with the change in the U.S. administration, the Canadian federal government may focus on developing a cap-and-trade scheme that will be consistent with the U.S. carbon market, in order to avoid the issue of “border adjustments,” which might otherwise be charged on Canadian exports to the United States, according to Concessi.

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