March 3, 2007

Businesses Rethink Carbon Curbs

A growing number of businesses are calling for federal caps on greenhouse-gases, which could spur Congress to action.

For years, most of the business community has strongly opposed controls on carbon dioxide emissions, which contribute to global warming. Reducing emissions would inevitably place new costs on businesses, particularly utilities.

But in the past few weeks, three industry trade groups that have long fought such regulation, the Edison Electric Institute, the American Gas Association and the Electric Power Supply Association, dropped their opposition to a cap. That coincided with calls for an emissions cap by the two private-equity firms bidding for Texas utility TXU Corp. Earlier this year, 10 corporations, including Wal-Mart Stores Inc. and General Electric Co., announced their support for mandatory curbs on greenhouse gases.

The shift underscores a growing belief that Congress eventually will pass mandatory emissions caps. Many business leaders have concluded it would be better for it to happen now rather than later, eliminating the current uncertainty. Moreover, they fear absent federal government action they'll be left to deal with a patchwork of state regulations. And they believe that by endorsing emissions caps, they'll be given a seat at the table in the negotiations over how such a cap would work.

Here's a closer look at what a national emissions "cap-and-trade" system would look like:

How would a carbon "cap-and-trade" system work? Companies would be required to have a permit for each ton of carbon that they produce. The government would limit the amount of greenhouse-gas emissions that companies could produce and create a market for companies to buy and sell permits to produce emissions beyond their caps. Firms that went beyond the mandated limit would have to reduce their emissions or buy permits from companies that had gone under their limits. The aim is to create a marketplace that would provide incentives for companies to invest in new, environmentally friendly technologies.

The 1990 Clean Air Act established a similar cap-and-trade system to combat acid rain, and it has been widely viewed as a success.

What types of proposals will Congress consider? At least five bills propose tackling global warming with some type of cap-and-trade market. The most ambitious bill would reduce emissions to 80% below their 1990 levels by 2050. Sen. John McCain (R., Ariz.) and Sen. Joseph Lieberman (I., Conn.) have proposed a target of 60% below those levels by 2050. The bill has been voted down twice before.

Sen. Jeff Bingaman (D., N.M.) offers a more modest approach, stabilizing emissions at their 2013 level by 2020 and including a "safety valve" that would force the government to issue more permits if the price of those permits rose too sharply.

Who wins and loses in a carbon market? Since the devil is in the details, it's still unclear who will pay how much. Pollution permits could be sold in an auction market or given away to companies. Utilities in the Southeast and Midwest that rely on coal-fired power plants are lobbying for a higher cap or more permits to offset what would otherwise create steep price increases because coal releases more carbon emissions than any other fuel. Conversely, West Coast and Northeast states that rely on cleaner fuels could be more insulated from higher energy costs.

Either way, consumers can expect higher energy prices because most emissions caps target electricity producers, who will pass those costs on to customers. A study by the U.S. Energy Information Administration estimates that under the Bingaman bill, electricity prices could rise 3.5% by 2020. Resources for the Future, an environmental group, predicts that under the McCain measure electricity prices could rise as much as 35% by 2025.

Companies that produce low-carbon fuels or energy-efficiency products could benefit from a carbon cap. But the steel industry, which produces large amounts of carbon dioxide, warns that a cap would raise costs and hurt their ability to compete with overseas rivals that aren't subject to pollution penalties.

FACTS

Write to Nick Timiraos at nick.timiraos@wsj.com²