If green is the new black, then controlling carbon emissions is the new green.

On Earth Day, three Congressional leaders on climate and energy issues laid out principals for a legislative solution to global warming challenges. Representatives Ed Markey, Henry Waxman and Jay Inslee released “Principles for Global Warming Legislation,” which provides a framework for establishing a mandatory cap and trade program designed to slash carbon emissions 26 percent by 2020 and 80 percent by 2050.

As the federal administration mulls capping carbon emissions to spur wide-scale adoption of renewable energy, proponents say it puts Wisconsin business in prime position to take a leading role in energy efficiency. Wisconsin already has emerged as a leader in clean energy research and development, states Scott Manley, director of environmental policy at Wisconsin Manufacturers & Commerce. At the same time, Manley warns such laws may boost energy costs, eliminate Wisconsin jobs and push many companies out of business or out of the region, something the state can ill-afford when it has lost nearly 130,000 manufacturing jobs since 2000.

“These are good paying, family supporting jobs that the state needs, to keep its economy going,” he says. “Cap-and-trade laws may significantly increase the cost of energy in the state, and then we’re not going to reverse this trend but worsen it.”

Whatever side of the fence your business sits on, the savvy Wisconsin business owner must begin preparing for the inevitable, according to John Larsen, senior associate of the Climate and Energy Program of the World Resources Institute, a Washington, D.C.-based think tank focused on identifying opportunities to reduce the risk of global climate change in ways that drive sustainable economic development.

Larsen recommends businesses appoint staff members to examine these proposals and what their implications may be. “You need to know what different policy outcomes could mean for your business,” he says. “The train is leaving the station and Congress is poised to act on the issue of climate change.”

What is cap & trade?

Taking action begins with an understanding of what cap and trade actually is. The nuts and bolts explanation is that cap and trade programs place a limit or cap on carbon emissions. Companies then receive emission allowances (usually by the ton) through either auction or allocation. Then as companies reduce their carbon footprints, the government lowers the cap each year until it reaches a pre-ordained emissions goal.

The idea is to set the initial cap at slightly less than current levels, ensuring there are plenty of allowances to go around, states Larsen. Over time the system reduces carbon emissions to levels scientists hope will stabilize the climate. While reducing emissions in this way seems reasonable, Larsen warns, “It’s not easy. It’s quite a challenging reduction and it won’t happen overnight.”

Companies successfully reducing emissions below allowance levels receive pollution credits they can sell to other firms. In Europe, where cap-and-trade laws have been in effect since 2005, these prices fall at $15 a ton, which doesn’t sound like much, says Manley, until one considers that Wisconsin companies reported 78.9 million tons of CO2 emissions to the state’s Department of Natural Resources in 2007. “If you do the math, that’s nearly $1.2 billion a year,” he states.

Stemming the tide of global warming drives the proposed mandates. The Union of Concerned Scientists calls a cap-and-trade program an effective way to build demand for clean energy technologies. By setting a cap on global warming pollution and asking polluters to pay for their emissions by purchasing energy credits, a price is put on pollution that this organization says allows the true costs of burning coal, oil and gasoline to be known.

Lisa Nurnberger, press secretary for the Union of Concerned Scientists, says the science shows these measures would keep the Earth from increasing 2 degrees Celsius from pre-industrial levels by the end of this century.Something, that she adds, if not done, will cost everyone — consumers and businesses alike — far more. “The price for not dealing with global warming is quite staggering,” she says. “If we don’t act on this, we’ll have to pay for things like flood damage; increased public health costs from heat waves; crop and livestock losses due to droughts and water shortages; increased irrigation costs and agricultural costs as crops endure pests no longer kept in check by cold winters.”

Climate stewardship

Because the potential for global environmental impacts exists, today’s companies must embrace the idea of environmental stewardship, states Jesse Heier, director of the Midwest Governors Association’s energy project. Midwest governors outpaced many other states 1 1/ 2 years ago when they signed “The Energy, Security and Climate Stewardship Platform” and “Midwestern Greenhouse Gas Reduction Accord.”

The platform, endorsed by all governors in the association, focused on the region’s perceived strengths and laid out specific goals and policies in the following areas: Energy efficiency, bio-fuels, advanced coal burning technology with carbon capture storage and renewable electricity. Heier says the platform offers a comprehensive view of where the region should move in these areas.

The accord, in contrast was signed by six of the nine state governors, and aimed to set a regional cap-and-trade system. Originally designed to address global warming issues because the federal government did not seem ready to act, Heier says the accord will pay big dividends as the federal government moves on these initiatives.

“It makes sense that we are out there advocating and protecting Midwestern interests sooner rather than later,” he says. “Our regional efforts will help influence what the national system looks like.”

Heier encourages all businesses to push forward in advocating for their state. He maintains Wisconsin stands to gain because of its strong emphasis on producing renewable and less carbon-intensive technologies. Its geologic formations, forests and agricultural land also provide fertile ground for capturing and storing emissions underground.

Plenty to lose

While Wisconsin has plenty to gain, it also has plenty to lose, say opponents. The state receives nearly 72 percent of its electricity from coal-fired electrical plants, nearly 22 percent higher than the national average. The Sierra Club reports coal-fired power plants represent a significant source of air pollution, with these facilities producing nearly 40 percent of total U.S. carbon dioxide emissions.

Combine that with the fact that Wisconsin boasts the second-most, manufacturing-intensive economy in the nation and manufacturing processes use more electricity than other types of businesses, and the concern becomes evident. When researchers studied the Lieberman-Warner Climate Security Act’s (a failed, first attempt at global warming legislation) potential impact on Wisconsin in 2008, they found cap-and-trade legislation could contribute to the loss of 74,000 jobs by 2030, increase electricity rates by 177 percent and drive natural gas prices up 160 percent, according to Manley.

He adds Obama aides estimate the cap-and-trade plan included in the president’s budget proposal would cost up to $1.9 trillion over eight years. Doing back-of-the-envelope math, Manley says that if Wisconsin represents 1.8 percent of nationwide emissions, the price tag to enact this legislation would cost the state approximately $4 billion a year.

The squeaky wheel

Businesses must prepare for emissions limits by readying their facilities to be more energy efficient. Doing this, Manley says, will pay big dividends down the road. Between 1990 and 2003, the state reduced its carbon emissions by nearly 20 percent for every dollar of economic output, a trend Manley says must continue. “It demonstrates Wisconsin businesses have become leaner, more efficient and are using energy more wisely than they have in the past,” he says. “The extent that we can continue to build upon that success will help mitigate the enormous cost we face with respect to climate change legislation.”

But when it comes to cap and trade, however, all is not gloom and doom, adds Nurnberger, emphasizing that if lawmakers correctly craft cap-and-trade legislation, the measures may actually save businesses and consumers money over the long-term. The Union of Concerned Scientists spent two years analyzing the issues behind this legislation and found that by 2030, businesses in the East North Central Region, which includes Wisconsin, could collectively save $33 billion in energy costs. How that shakes out, however, depends on how the government distributes allowances. The organization’s figures are based on a system where allowances are auctioned off and businesses must purchase the energy credits they need. The study also based its calculations on investing the money raised by these sales in new energy technologies, including revamping electrical plants to generate at least 25 percent of their electricity from clean, renewable energy sources and storing their emissions underground instead of releasing them into the air.

Midwest governors see this focus as a mechanism to bring more jobs to the region whether in building the next-generation of coal-fired plants, installing pipelines to transport emissions to underground storage reservoirs, manufacturing windmill components or constructing bio-fueled power plants, according to Heier.
But all of this takes money, and for this reason it’s crucial that Wisconsin lawmakers and businesses let it be known how the state differs from other regions of the country and promote plans to address these unique challenges.

While controlling emissions might be the new green, it’s clear it’s not a black-and-white issue, especially where Wisconsin is concerned. The current Congressional proposal contains few answers on how money raised through emissions permits will be spent. The old saw “the squeaky wheel gets the grease” never rang more true. Now is the time for Wisconsin businesses to make sure their message is heard.

Allocation vs. auction: Which is best for Wisconsin?

When you talk cap and trade, everyone has a different idea of what it means, what it will do, how it will work and how it will affect them. One of the major sticking points is whether an auction- or allocation-based system will work best. And there’s little agreement on this point either.

Corporate Report Wisconsin talked to several people about this very issue, and here’s a snippet of what we’ve learned about allocation vs. auction and how business owners can involve themselves in the debate:

The question, says Scott Manley, the Director of Environmental Policy for Wisconsin Manufacturers & Commerce (WMC), is whether the government should require companies to buy an offset for every ton of carbon dioxide they release or allocate companies a set number of emissions credits then force them to purchase the rest.

He says auctioning emissions credits is essentially a carbon tax. But instead of having a fixed rate, the auction price varies as the market fluctuates. And this, he adds, is why a policy that is 100-percent auction based may be a bad idea. “At least with a carbon tax companies know what their costs will be because they are fixed,” he says.

While every Midwestern governor may have a different take on this issue, Jesse Heier, director of the Midwestern Governors Council Energy Project, agrees there’s something to be said about providing cost certainty to companies purchasing these allowances. “The government must make sure allowances are doled out in the most appropriate way possible,” he says.

John Larsen, senior associate with the World Resources Institute’s Climate and Energy Program, notes that in a state like Wisconsin, which has a regulated electricity market, energy costs may skyrocket if these entities must pay for each credit in an auction-based system. One utility spokesperson predicts utility customers may see a one-percent increase in electrical rates for every dollar spent on emissions credits. These companies will likely pass their increased costs on to customers; with state manufacturers shouldering most of that load.

This increased cost, particularly in a state like Wisconsin, which gets the bulk of its electricity from coal, may put companies at a disadvantage with their competition.

“It then becomes a big incentive for manufacturers to shift their processes off-shore to countries like China, Mexico or India, who have indicated they have no interest in any kind of CO2 regulation,” says Manley.

Even so, the apolitical auction approach does appeal to some people because the government isn’t deciding who receives emissions credits and how many they receive; anyone who needs them pays the price they are willing to pay for them. These proponents argue an allocation approach can foster a climate of horse-trading and other inefficient outcomes because one company has more political clout than another.

But even this process is not without politics. Once the credits are auctioned, it becomes very political as decisions are made about how to spend the money raised through auction.

Lisa Nurnberger, press secretary for the Union of Concerned Scientists, states an auction-based policy can work if the government reinvests the funds raised into clean energy research and installation, and returns a portion to energy consumers to mitigate increased energy costs.

What does this mean for Wisconsin business? Larsen says it comes down to two critical points.

Business owners should expect and prepare for an eventual increase in fossil fuel energy costs. Preparations can include upgrading buildings for greater energy efficiency and converting facilities to use bio-fuels or other renewable energies.
Business owners should get involved now to ensure that the cap-and-trade policy includes mechanisms to help them upgrade their facilities to make them more energy efficient and offset their increased electrical costs. Larsen advises business to contact trade associations in the state already debating this issue, including WMC at www.wmc.org and the Midwestern Governors Association at  www.midwesterngovernors.org/EnergyInitiatives.htm to get up to speed and present their concerns. He also recommends contacting members of Congress, including Rep. Tammy Baldwin at   " http://tammybaldwin.house.gov/; Sen. Herb Kohl at    http://kohl.senate.gov/; Sen. Russ Feingold at  http://feingold.senate.gov/; and Gov. Jim Doyle at  www.wisgov.state.wi.us/ to express their views.
“If a company wants to have its voice in the mix, now is the time,” he says.

By Ronnie Garrett

Ronnie Garrett is the Editor of Corporate Report Wisconsin.

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