Magazine article Risk Management

Cap & Trade: Rod Taylor, Managing Director of Aon Environmental Services, Talks about the Cap and Trade Bill Currently in Congress and How a New Regime Will Affect Companies Nationwide

Magazine article Risk Management

Cap & Trade: Rod Taylor, Managing Director of Aon Environmental Services, Talks about the Cap and Trade Bill Currently in Congress and How a New Regime Will Affect Companies Nationwide

Article excerpt

What does cap and trade mean?

The concept of cap and trade is an effort to reduce overall emissions of greenhouse gases, and it's done by providing an allocation of emission permission, or permits, to people who are already carbon emitters and then reducing the allowances over time. So you take the tons of greenhouse gases emitted by the regulated classes of industry and then allocate so much to each one.

If the reduction target is 5% by next year, for example, you reduce the allowances by 5% and companies that are unable to reduce their own emissions will have to either purchase allowances from someone else or take some of their units [that emit carbon dioxide] out of service. It's a way to reduce total emissions without necessarily putting any individual emitting facility out of business.

How successful has the European cap and trade system that was launched by the Kyoto protocol in 2003 been?

They went through one round of "testing" the allowance system and it appears that they overestimated the tons of carbon that were going to be emitted. The allowances were overgenerous so it didn't result in as significant of a reduction as they had hoped for. It also affected the price at which carbon was selling. They had expected carbon to sell around the range of $30 per ton, and it wound up selling for somewhere around $12 per ton. [But] they recognized there was an error in the trial period and they have now made some adjustments in the allocations and the price has started to adjust.

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I think it will take some period of time like that in the United States where we try out the system, we see how it works and then we apply it. Their market is beginning to work fairly well and I think the same thing would happen here after a period of adjustment.

What a lot of people may not know is that the U.S. already has some regional initiatives set up, correct?

Yes. There's one that's in effect and that's the Northeast region; RGGI [pronounced "Reggie" and short for the Regional Greenhouse Gas Initiative] would be the nickname for it. It is a regional emissions limit that applies primarily to operators of power-generating utilities. It's working reasonably well, although it is limited to 10 states. But it affects at least a segment of the market and it shows that those things will happen here.

There is a proposal for a similar scheme in the western states that is not yet in effect, but may go into effect if we don't end up passing the federal legislation in the next 12 months.

There is a carbon trading exchange already set up for that called the Chicago Climate Exchange. How does that factor into all this?

The Chicago Exchange was set up before the RGGI legislation so it was a voluntary market that already existed, but it is the dedicated market for that program so it is where the carbon credits that are required by that program are traded. The price of carbon has been relatively inexpensive in the United States compared to what it is in Europe and probably will remain so until we have a more universal or more widespread application of these kinds of emission controls.

With respect to a federal plan, something for which a bill has already passed in the House, how would the Chicago Climate Exchange be used to help make this system operational?

The proposal is to use the Chicago Exchange for trades that are required for acquiring carbon emission credits, so that system is already up and running. …

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