Global, national and regional policies are already developing carbon reduction strategies, which may drive the future of biofuels—at least politically. As pressure increases to reduce carbon emissions in an effort to curb global warming, government and corporate interest in systems that allow for the trading of carbon credits also peaks. Carbon cap-and-trade systems are already in use in overseas markets through policies developed under the Kyoto Protocol.
Generally a cap-and-trade system is based on an emissions limit, or cap, which is set for an industry sector based on units of output. Allowances are allocated to participating entities to emit a specified amount of emissions. If the entities can reduce their emissions below the cap, they can sell their credits to those that emit more than the limit. The extra emissions reductions offered for sale are often called offsets.
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The idea is gaining popularity in the United States, especially amongst regional governments. The Regional Greenhouse Gas Initiative (RGGI) is a cooperative effort by 10 northeastern and mid-Atlantic states to reduce carbon dioxide emissions. The RGGI participating states are developing a regional strategy for controlling emissions; central to the strategy is a multi-state cap-and-trade program. Six western states have formed a similar initiative called the Western Regional Climate Action Initiative, which also will develop a cap-and-trade system. "This [initiative] sets the stage for a regional cap-and-trade program, which will provide a powerful framework for developing a national cap-and-trade program," said California Gov. Arnold Schwarzenegger when the initiative was announced in February.
Interestingly, calls for national greenhouse gas regulatory policies are coming from multi-national corporations. An increasingly large group in both size and influence is the United States Climate Action Partnership (USCAP). Twenty-eight major businesses and environmental organizations have formed the coalition, which is calling for the federal government to take immediate action to enact mandatory national legislation to achieve significant reductions in greenhouse gas emissions. The cornerstone of the group's approach would be a cap-and-trade program. The group recommends Congress provide leadership and establish short- and mid-term emissions reduction targets; a national program to accelerate technology research, development and deployment; and approaches to encourage action by other countries, including those in the developing world, as ultimately the solution must be global.
The group's philosophy refutes the claim that regulation will stifle the economy. "In our view, the climate change challenge will create more economic opportunities than risks for the U.S. economy," according to the USCAP Web site.
Congress is working on an answer to the private sector's demand. This spring, the House Committee on Energy and Commerce held 15 hearings on climate change. The committee asked questions focusing on the ramifications of greenhouse gas emissions and a cap-and-trade policy, and heard from over 90 witnesses. According to a staff member for the committee, a bill addressing climate and carbon issues may be introduced in September.
While a carbon tax would probably be a better approach from an economist's standpoint, a cap-and-trade policy may be the most realistic way to reduce greenhouse gas emissions, said committee Chairman Rep. John Dingell, D-Mich. The bill has not been drafted, but Dingell said the structure of the policy probably won’t mirror Europe's cap-and-trade system.
A federal policy is likely to spur action on existing carbon trading markets, such as the Chicago Climate Exchange (CCX). The CCX is North America's only legally binding, rules-based greenhouse gas emissions allowance trading system. It’s also the world's only global system for emissions trading based on all six greenhouse gases. Over 200 businesses and groups from all sectors of the economy—including the Renewable Fuels Association (RFA)—have signed on. Members make a voluntary commitment to meet annual greenhouse gas emission reduction targets. Those who reduce emissions below the targets have surplus allowances to sell or bank. Those who emit above the targets comply by purchasing CCX Carbon Financial Instrument (CFI) contracts. One CFI contract is equal to 100 metric tons of carbon dioxide. At press time, one CFI was trading for $3.50.
Offset Credits for Ethanol Production
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