Thursday, July 31, 2008

Considering "Cap and Trade"

The big investor-owned utilities that have already started down the road toward broad renewable energy portfolios are lining up behind the "cap and trade" system being considered for implementation in California. Other utilities like the Los Angeles DWP? Not so much.

LADWP says that cap and trade would cost it $700 million a year in fees because it relies heavily on out of state coal-generated power. That same out of state coal-generated power, the utility is quick to point out, was what allowed LADWP to weather the storm during the energy crisis, even allowing it to sell off excess power.

The real issue is not whether certain utilities will get the short end of the stick-- that's more or less inevitable in any kind of paradigm shift of the magnitude being considered-- but how to prevent a "cap and trade" system from being exploited the way deregulation was.

According to an AP write-up on the subject:

"Other municipal utilities in California are concerned that a carbon-trading system would subject them to market manipulations similar to those experienced during the 2000-2001 energy crisis, which cost the state roughly $50 billion.

"If we get this one wrong, consumers are really going to have to hold their breath because it's not going to be pretty," said Scott Tomashefsky, regulatory affairs manager at the Northern California Power Agency, which represents 15 public utilities serving about 700,000 customers."

It's all going to come down to what kind of a marketplace gets designed for the buying and selling of carbon credits. One California firm, Carbon Tracing, Inc., appears to be out in front of the issue and has put out a pretty comprehensive white paper addressing the potential pitfalls and needs that must be addressed.

In its reconmmendations, Carbon Tracing states that we should "Allow private industry to develop, implement, and manage the underlying infrastructure for verification, certification, and rating of all carbon financial instruments..." with the caveat that "The SEC in cooperation with the CFTC shold be requested to participate in the development of potential frameworks necessary to avoid price manipulation."