Article Info Email to a friend Printer friendly

To broaden this issue further, one can start looking at the basic business exposures of carbon globally. There are going to be price inefficiencies—even within one multinational company falling under multiple carbon regimes in different regulatory jurisdictions. I have been asked many times if there will be one price for carbon and the answer is: absolutely not. In effect, there are going to be regional and international differences, even within multinational companies. The prices on the futures screens are for standardized contract which may capture 20 to 25 percent of the carbon market. But, much more trading will be bilateral and over-the-counter (OTC).

How to Begin the Carbon Enterprise Process

The first step in carbon asset management is measuring the carbon exposure. This is business unit by business unit analysis, and is affected by fuel mix, mobile vs. stationery sources, cross commodity exposures, weather exposure and basic global economic forces, to name a few of the risk exposures. The bottom line is that the decarbonization of the global economy, which is really the goal of all greenhouse gas legislation, is to create protocols that are ubiquitous and will be implemented to change business behavior. The process is only beginning. The actuality is that the global carbon footprint continues to increase each year primarily from the burning of fossil fuels (It has been up 3.1 percent per year globally since 2000 due to increased global usage of fossil fuels).

Need for Registries is Preeminent

The United States needs to immediately create a national greenhouse gas emissions registry. We can only manage what we can measure, and a Federal registry of emissions from all feasible sources in the economy provides the backbone of all types of carbon regulation, whether cap-and-trade or carbon taxes. Starting a registry today can be done in parallel with debate over legislation in Congress, and will help speed the rollout of any final climate legislation. Under the U.S. Department of Energy (DOE) is there is a registry called Section 1605 (b), but it has no enforcement teeth and has been involved in endless policy debates. The goal should be to make EPA the repository of such a registry, not DOE.

There are many other registries available in the United States, and these registries are going to have to harmonize with a Federal registry. The most prominent is the California Climate Action Registry, which has cloned the Climate Registry which now involves 39 U.S. states, 8 Canadian provinces and 2 Mexican states. What is really emerging is a North American carbon market which will fall under the North American Free Trade Agreement (NAFTA). Registries will be the backbone of the North American, European and Kyoto carbon markets.

Beginning of New Environmental Software Applications

The emerging greenhouse gas market is ripe for software solutions on an enterprise level. Today, the environmental software space is quite small. It is estimated at $100 million with many small companies developing and extending their domain expertise into this area and beyond energy company applications (energy companies have had to comply with environmental laws in many jurisdictions for over a decade).

Three companies in this environmental software arena that we are familiar with are Vision Monitor in Houston, Locus Technology in Walnut Creek, California and Carbon Flow in San Francisco. Each is working to create solutions to manage information in this expanding space. Much of this work has primarily focused on the energy industry which already knows its carbon footprint. And therefore, much of the other domain expertise for this new environmental software application will come from the energy trading software companies such as TriplePoint Technology, Allegro Development, Open Link Technology and the suite of Sungard products. In this case, the application will be more trading oriented. So, the software division is measuring and managing your carbon footprint, and then trading and structuring division is measuring your carbon exposure. Carbon is de facto, becoming a new asset class for investors, as it is not correlated to any other market.

Measuring and Managing the Carbon Footprint

Finally, the point of knowing your carbon footprint on a real-time basis is to do something about it. What U.S. greenhouse gas regulations will create is regulatory certainty. That regulatory certainty will provide financial certainty for investment in cleaner energy and clean technology. Obviously, both implementing more energy efficiency and deploying more renewables offer some degree of carbon reductions. On an enterprise level, a company will need to look at all energy intensive usage, couple that carbon intensive processes, and change the electrical, mechanical and chemical processes used. That will take time and engineering talent.

Active management of the corporate carbon footprint requires software and humanware. We will need people trained to evaluate carbon exposures in financial terms, not just passive measurement and monitoring of emissions. The good news is that the problem has been identified and is now actively engaged. The solution will take finance, technology and engineering. But the outcome of reducing carbon will be better human health and creation of a new class of assets that must be actively managed.

Peter Fusaro will be holding his last carbon markets and finance seminar for the summer in New York on July 9th. If interested please find additional information or to register at www.pgsenergy.com/seminars/112html. He has also launched the Carbon Footprint Exchange (www.retractimpact.com).