California Firms Need To Prepare For a 'Cap-and-Trade' Emissions Program

06 September 2006

California bill AB 32, which passed last week, requires the State to reduce carbon emissions to 1990 levels by the year 2020, with controls expected to begin in 2012. Energy-intensive industries such as the power sector, refineries, and cement manufacturers are likely to be required to reduce emissions through a "cap-and-trade" system similar to existing trading programs for CO2 and other emissions, including the EU ETS, the US SO2 Allowance Program, and Southern California's RECLAIM trading program. The California Air Resources Board is required to develop a "scoping plan" by 1 January 2009 and to hold public workshops to provide opportunities for interested parties to comment.

"The California legislation is the latest example of mandatory carbon controls similar to the cap-and-trade system now in place in Europe coming to the United States. Companies in California -- and indeed elsewhere as well -- should plan now on how best to respond," said Dr. David Harrison, Jr., Senior Vice President at NERA Economic Consulting and head of NERA's Global Environment Group.

"Our experience in Europe shows that effective preparation can allow firms to clarify the financial implications of policies, assess what provisions of a trading program are most important, and determine what they should do in advance of the program. NERA has developed a set of models that allow companies to determine the potential effects on their bottom lines," he said.

Dr. Harrison and NERA's Global Environmental Group have helped firms in the US, Europe, and Asia understand and prepare for such cap-and-trade programs, in which total industry emissions are capped and firms are able to trade emissions permits on an open market. A mandatory carbon emissions cap-and-trade program went into effect in Europe in January 2005. NERA has worked with the European Commission, the UK government, and various private firms to develop allocation plans, assess market impacts, and assist firms in determining their best plan of action.

"Companies that did not understand the implications of the European regulations have not fared well compared to those who were prepared," says Daniel Radov, Vice President in NERA's London office, who has directed NERA's European work in this area.

"The total annual value of European allocations is around 40 billion euros, and the EU program affects energy prices and company profits, so the EU Emissions Trading System has already had a major effect on firms' bottom lines," Mr. Radov added.

US Contact:
Dr. David Harrison
Senior Vice President, Environment Group Head
+1 617 621 2612
david.harrison@nera.com

European Contact:
Daniel Radov
Vice President
+44 20 7659 8744
daniel.radov@nera.com

NERA Economic Consulting (www.nera.com), founded in 1961 as National Economic Research Associates, is a unit of Mercer Specialty Consulting, an MMC company.

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