Point Carbon, a carbon trading consulting firm, released a 16-page report in an attempt to predict what a carbon market would mean for America. While there may be a conflict of interest behind a consulting firm releasing research on a market based on pending legislation that they stand to profit from, the report lends some critical insights into how much energy companies stand to gain or lose due to cap and trade.
One of the most talked about bits of information released by the report is how differently cap-and-trade will affect different states. Pacific Coast and Northeast corridor states will see a slight increase in power prices, while the Midwest, South, Great Plains, and Mountain regions will be affected much worse. Residents of New Mexico, Kansas, Utah, Wyoming, and North Dakota could stand to see triple the increase in their electric bills than those living in Seattle, for example.
Political commentators at the New York Times point out that this debunks the myth that Republican opposition to the bill is a result of corporate America. The difference in electricity costs represents Republican states being forced to buy carbon credits from bi-coastal Democrat states.
Graphic by Point Carbon
The report is quick to state that the proposed carbon market would separate electricity distributors, those who sell power to consumers, from the actual carbon market, instead choosing to put the onus of compliance on the generators. This creates a somewhat complicated system, where clean power companies surrender their compliance credits to the federal government for free redistribution to coal merchant generators and local electricity distribution companies (LDC). This leaves clean power generators with only their excess carbon credits to trade in the offset market, where they can be bought by generators that do not meet their compliant levels. In addition, dirty generators may be able to eschew the carbon market altogether and buy carbon credits from their LDC (who earlier received free credits from the federal government) at a flat rate. When the generator then sells power to their LDC, they will charge higher rates to cover their costs (as their state allows). The LDC will pass these costs on to the consumer.
The Point Carbon report mentions that generators that are a part of a large holding company, i.e. large-scale utilities who both generate and distribute their power, will be sheltered from the carbon market due to their ability to internally trade carbon credits. Put simply, this means that if the name of the company that owns and operates the nearby coal plant appears on the letterhead of your monthly bill, they are going to be able to deflect the burden of cap-and-trade and continue doing business as usual. An editorial on the Wall Street Journal points out how this could lead to the rapid centralization of the utilities industry, as independent generators are saddled with the brunt of carbon costs while companies like #1 Exelon not only shrug the bill, but sell carbon credits from their nuclear-heavy fleet to the tune of $1.7 billion. This figure, published in Point Carbon's report, may be why Senator Lamar Alexander (R-TN) jokingly told Exelon CEO John Rowe that he would agree with him on cap and trade if he were on Exelon's board of directors.
Oil companies, being multinational and deregulated, won't need to take part in the complex system above, and will simply pass all of the costs of carbon trading to consumers via inflated gas prices. Oil companies will have a much higher cost, according to Point Carbon, with Exxon taking the top spot at $5.9 billion. Despite having a much larger carbon cost, oil companies receive practically no allowances. This is because the carbon pollution created in the oil industry is "dwarfed" by the carbon pollution created by actually burning the fuel for transportation.
Oil companies would effectively be taxed for the pollution their customers are generating from using their product, so Boxer-Kerry will work more like an industry-set tax on gasoline, which Point Carbon assumes will be set by Chevron, who refines a majority of their fuel out of country and is thusly less exposed to the costs of Boxer-Kerry. Chevron will be able to recuperate 99.6% of their $5.37 billion carbon cost through higher gas prices, allowing them to have more competitive prices than their competitors. ExxonMobil and ConocoPhillips will recover 99.2% and 99.1% of their carbon costs, respectively, and are likely to take a hit to their bottom line to remain competitive with Chevron. The Point Carbon report shows that refinery operations in the United States could be classified as risk exposure, and may be seen increasingly unpopular among oil suppliers in America. Despite this, the report shows that Boxer-Kerry will have almost zero impact on oil company revenue.
Point Carbon warns that although oil companies are reclaiming a most of the cost of carbon from their customers, market disruptions and other events that cause a time lag or discrepancy between when oil companies pay billions in carbon costs and when they recover that money through inflated sales prices leave the industry vulnerable to "large financial consequences." Because oil companies will be responsible for billions in outlay, any drastic drop in demand is likely to have a reverse effect and push prices farther north as oil companies attempt to recover their carbon expenditure within an allowable timeline.
Much like oil producers, electric generators in deregulated markets are allowed to pass 100% of their carbon costs on to their customers. Unlike oil, however, the coal industry successfully lobbied to receive millions of dollars worth of free credits for the first 5 years of cap-and-trade in order to collar consumer prices. This was also included in Europe's cap and trade bill, though the billions of dollars in carbon credits were largely pocketed by coal companies and consumer rates were increased anyway in anticipation of the unfettered carbon market. This created windfall profits for European coal companies like RWE, who saw revenue increases in the billions. American coal companies are expected to follow suit.
Graphic by Point Carbon
The Point Carbon report plainly shows who the largest losers will be under Kerry-Boxer, specifically electrical generators in regulated states where cost increases can only be passed onto the consumer in a limited fashion. Southern Power, AEP, and even nuclear-friendly Duke Energy stands to lose millions in the face of a carbon market. While diversifying their generation (as Duke is trying to do with new nuclear and wind projects) will reduce their exposure to carbon costs, siting and construction are expected to take years, and profitability may take even a decade longer. The Wall Street Journal speculates that lobbying for utility deregulation in their service area may be faster and exponentially more cost-effective, allowing utilities to pass the cost of carbon on to the consumer with inflated energy prices in a similar fashion to the oil industry.
Outside of this narrow band of utility companies, the report shows that consumers will see the biggest hit to their bottom line. The New York Times recognizes that while cap and trade is publicized to be about holding big industry accountable, the true — and quiet — goal is to purposefully make consumer electricity more expensive, both to encourage efficiency and create an artificial preference for renewable energy.
Point Carbon suggests that a $15 carbon price tag will result in a 15¢ increase in the cost of gasoline, though these calculations isolate oil's price structure from externalities like consumer spending and supply shortages. Point Carbon does not offer up a figure for how much more expensive consumer electricity would be due to the complicated trading system, but shows that wholesale prices could go up as much as 34%.
This wealth of economic data does not touch the actual positive environmental impact that cap and trade will have on the environment, which climate scientist James Hanson and Greenpeace both believe will be very little. Greenpeace, in an official press release, said that cap and trade was little more than political spin on "business as usual" to capture environmental cheerleading. Dr. James Hansen stated that cap and trade is "no more fit to rescue our climate than a V-2 rocket was to land a man on the moon." Proponents of cap and trade like EPA Administrator Lisa Jackson and Secretary of Energy Steven Chu say that although diluted from its original purpose, the bill is important to signal to the international community that America can pass legislation based on climate science and that cap and trade can be improved further along down the road to make a more meaningful difference.
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