Supreme Court to consider climate change rules

The court will hear arguments in a case to determine whether the Environmental Protection Agency should regulate emissions of carbon dioxide as a pollutant. Rulings aren't expected until next summer.

Carbon dioxide is a heat-trapping gas that contributes to climate change. As concerns over global climate change build, many experts expect the U.S. federal government to put mechanisms in place to reduce carbon dioxide in the atmosphere.

"The debate has shifted from whether or not there will be federal regulations, to when it will come," said Fred Wellington, a senior financial analyst at the think tank World Resources Institute. "The smart money understands that climate policy is coming."

What is still up in the air is what form regulations will take, and whether state and local efforts to reduce greenhouse gas emissions will be coordinated with any federal policies, Wellington said.

One possibility is a carbon tax that would be paid by large organizations, such as utilities and manufacturers. Another system, already used to reduce other gases in the U.S., is a "cap and trade" system, in which possible polluters are allocated a certain number of units of carbon dioxide emissions. If they emit more than their allocated cap, they can then purchase credits, or "offsets," on carbon-trading markets. These credits can be the surplus emission units from companies that have not reached their set limit.

This sort of trading system was introduced in Europe in January 2005 as part of the Kyoto Protocol on Climate Change. Participants manage and trade carbon dioxide credits like other commodities with varying prices, such as fuels and crops.

This month, exchanges under the European Union's Emission Trading Scheme passed one billion tons of greenhouse gas emissions, which is roughly the annual output of Germany, according to market tracker Point Carbon. Eighteen billion euros, or $23 billion dollars, worth of carbon dioxide have been traded.

"We're seeing an increasing number of participants in the EU ETS (European Union Emission Trading Scheme). The players in the market are major utilities, investment banks and key European industrial companies," said Henrik Hasselknippe, manager of Point Carbon's EU ETS team.

The exact cost of regulations to business will depend on the initial allocations as well as companies' ability to stay under set targets.

States' pressure
The U.S. does not have federally mandated policies to curb greenhouse gas emissions, as Europe does. However, there is growing pressure among states, and even cities, to address climate change by putting a price tag on carbon.

The Regional Greenhouse Gas Initiative (RGGI) is a plan endorsed by northeast and mid-Atlantic states to reduce carbon dioxide emissions through a cap-and-trade system.

And California last month passed the California Climate Act of 2006 (click here for PDF), which gives the California Clean Air Commission the authority to put a cap on greenhouse gas emissions from power plants and other "stationary sources." The state has also mandated reductions of greenhouse gas from trucks and cars.

That oversight could be extended, depending on the outcome of the case being heard on Wednesday. The U.S. Supreme Court will consider whether the U.S. EPA can decline to regulate emissions standards on motor vehicles, as the agency has argued it can do. The court is also supposed to determine whether the EPA has the authority to regulate carbon dioxide as an air pollutant associated with climate change.

The case (click here for PDF) is being brought by 12 states; cities including Baltimore, New York and Washington; and other groups.

It is a challenge to a decision from D.C. Circuit Court, which sided with the EPA when it argued that the agency lacks the authority to regulate greenhouse gas emissions and that it can decline to do so, according to a summary on the Supreme Court of the United States Blog. The Bush administration favors voluntary programs to reduce emissions.

In addition, there have been hearings in Congress on climate change-related policies.

Sen. Barbara Boxer is set to replace James Inhofe, who has shown skepticism of global warming, as the chair of the Senate Environmental and Public Works Committee. Earlier this month, Boxer and other senators called on the president to "move quickly to adopt economy-wide constraints on domestic GHG (greenhouse gas) emissions and then work with the international community to forge an effective and equitable global agreement."

The legislative process is expected to gather input from large businesses, which are large carbon emitters and influential in the climate change policy decisions, the WRI's Wellington noted.

Corporations, as well as other countries, are putting pressure on the federal government to establish federal rules, rather than deal with a patchwork of state mandates, which can be more costly, he said.

Through various energy-saving initiatives, the information technology industry has also taken measures to lower power consumption. Power is a significant cost of operations, with some businesses spending nearly 20 percent of their IT budgets on electricity.

Consistent guidelines are important to businesses because they make large investments amortized over many years, Sun Microsystems' vice president of eco-responsibility David Douglas noted. A data center's servers are typically viewed as a 3-to-5 year investment, while generators on a data center are more like 10 to 20 years.

"What's most important is we get clear guidance from government on what the regulatory environment will look like for these periods. If it's very uncertain, it's hard to make decisions," Douglas said. "If CO2 (carbon dioxide) gets expensive, we might make a different set of decisions."

The Kyoto Protocol, which does not count the U.S. as a participant, sets emission reduction targets only through 2012.

The U.S. can stand to learn from Europe's experience in setting up a cap-and-trade program. The initial allocations of carbon emission credits--which can be given away or auctioned off--are extremely important, WRI's Wellington noted. Emissions limits that are initially set too low can result in a surplus of allowances, which decreases the value of these credits on trading markets, he said.

Putting a price on carbon emissions through a tax or cap-and-trade system can act in tandem with other regulations to promote cleaner forms of energy, said David Hullah, an associate at venture investment firm RockPort Capital Partners, which invests in energy-related companies.

"I expect to see (carbon-related regulations), and I think they'll have tremendous influence," Hullah said. "I strongly believe they can be a direct lever to use less energy."