April 21, 2008
BILL MONGELLUZZO
Transport companies slow to profit from environmental advances
As they rush to comply with a proliferation of anti-pollution requirements, freight transportation companies resemble a horse wearing blinkers. They see the finish line for compliance but are blind to moneymaking opportunities on the periphery. Those opportunities lie in the complex but potentially profitable trading of pollution credits among companies that face regulatory limits on emissions. Cap-and-trade programs are open to any industry that’s governed by pollution standards.
Utilities and large manufacturers have learned to use them to their advantage, but the supply-chain industry has been slow to catch on. Shipping lines, terminal operators, truckers, railroads and warehouse operators also could profit from the pollution-reduction regulations that are being developed by states, the federal government and global organizations such as the International Maritime Organization.
The problem is that the freight transportation industry, focused on its day-to-day business requirements, has been hesitant to venture into such unfamiliar territory. It’s a missed opportunity, according to Stephanie Williams, an environmental consultant and former legislative director of the California Trucking Association.
“All segments of the transportation industry can engage in cap and trade,” Williams said. “The transportation industry has no seat at the table. This is a golden opportunity passing them by.”
The concept of capping and trading emissions credits is simple, even if carrying it out can be complex. It becomes possible when a regulatory agency such as the California Air Resources Board, U.S. Environmental Protection Agency or the IMO sets overall pollution standards for various industries. If a company that is expanding facilities or purchasing new equipment makes the extra investment to reduce pollution even more than the regulation requires, it can accumulate credits. These credits then can be sold to other companies, even in other industries, that can’t meet pollution standards.
In other words, some companies overachieve in reducing pollution, and they receive financial benefits for their efforts, and the companies that buy these credits in effect pay for the right to pollute. The net result for the environment is that industrial expansion takes place with no net increase in pollution.
The cap-and-trade system can work remarkably well for transportation companies because the cost of a low-polluting truck or locomotive, while perceived as being expensive within those industries, is minuscule compared with the cost of a new power plant. Utilities, for example, are more than willing to purchase credits from carriers and marine terminal operators, if only the transportation industry would participate in cap-and-trade arrangements.
Existing emissions-trading regimes have demonstrated that large polluters can reduce their regulatory-compliance costs by 25 to 50 percent below what it would cost if they had to reduce emissions at each of their facilities, said Bob Wyman, a partner in the Los Angeles law firm Latham and Watkins.
Wyman, however, said the concept has gained little traction in the transportation industry. Several years ago, he participated in an effort that the Port of Long Beach funded to establish an emissions-trading mechanism for transportation companies in the harbor area.
Potential buyers of credits — power companies and utilities — rushed to join the effort, said Bob Kanter, the port’s managing director of environmental affairs and planning. “We had willing buyers,” he said. But after a year of fruitless efforts to persuade shipping lines, terminal operators and other transportation providers to participate, the port abandoned the effort. “We tried like crazy to get the industry to the table,” Kanter said.
The trading regime proposed by Long Beach would have been ideal for freight transportation because the industry will profit much more by being a seller of credits than by being a buyer, Williams said. Utilities and power companies bid up the cost of pollution credits because such credits are scarce, and yet the utilities can save significantly by, in effect, purchasing the right to pollute, she said.
Although transportation companies have been reluctant to join cap-and-trade systems, there are numerous examples of successful systems. In the U.S., one of the best examples is found in the Midwest and Northeast, where the federal Clean Air Act of 1990 established a program to reduce acid-rain pollution from power plants and factories. The program includes a cap-and-trade mechanism that participants have used for more than a decade.
Other cap-and-trade systems have been established in states such as Illinois and New York and in the European Union. Such a system also is being developed in California, where air pollution from freight transportation has emerged as a high-profile issue that threatens port expansion. Private-sector exchanges in Chicago and London have been formed to broker deals between buyers and sellers of pollution credits.
None of the existing cap-and-trade systems, however, have made specific provisions for freight transportation companies. With states such as California imposing caps for transportation pollutants such as nitrogen oxides, particulate matter and greenhouse gases, industry experts say that now is the perfect time for the freight transportation industry to look for ways to profit from emissions trading.
It is the proliferation of pollution regulations affecting transportation that will lead the industry into cap-and-trade programs — if the companies are willing to take the initiative — said T.L. Garrett, vice president of the Pacific Merchant Shipping Association.
An example could be a 2006 California law, known locally as A.B. 32, that sets specific requirements for pollution reduction. The law is based on a market system that will include credits and trading, Garrett said. The plan is ambitious. Its goal is to reduce greenhouse gas emissions in California by 30 percent by 2020 and 80 percent by 2050.
The California Air Resources Board is working to determine how extensively a market mechanism such as a cap-and-trade program for pollution credits can be used under the new law, said Stanley Young, a CARB spokesman.
Until now, CARB’s involvement with freight transportation has been limited to localized pollutants such as particulate matter from port and rail drayage trucks and diesel pollution from ocean vessels. CARB is developing regulations for drayage trucks and for shore-side electrical plug-ins for docked ocean vessels.
Although A.B. 32 involves greenhouse gases, CARB is holding public meetings to discuss the law, and the meetings are open to all industries, Young said.
Specialists in industry pollution say shipping lines, terminal operators, trucking companies, railroads and warehouse operators should participate in such meetings. Williams said any cap-and-trade system that evolves from efforts by CARB and other regulatory bodies can be favorable to the transportation industry if the systems are structured so that they include transportation.
The first step, Garrett said, is for the industry to develop an accurate and widely accepted inventory of current pollution from various transportation sectors. CARB’s initial efforts in this area set the stage for developing such inventories, he added.
The industry also must understand the standards that regulatory bodies have established to limit pollution. Young said, for example, that if a trucking company merely meets the pollution standard set by CARB, it has nothing to trade. In order to generate potential credits, the motor carrier must reduce emissions to below what the regulation requires.
Garrett emphasized that transportation companies must establish their legal rights as owners of the credits that their anti-pollution efforts generate. For example, if a shipping line invests in new vessels that can be powered from shore-side electricity while in port, the shipping line must claim its share of the credits before they’re claimed by the port authority or electric utility company that supplies the power.
Wyman said the general principle in such cases is that the entity that invests in the asset receives the credit. “It follows the money,” he said.
Cleaner-operating trucks and shore-side power for ships are only two examples of ways that transportation companies could generate valuable credits that could be used in cap-and-trade programs. Investing in low-emission cargo-handling equipment at marine terminals, re-powering tugboats and installing solar panels on terminal office towers also present opportunities, Wyman said.
Transportation companies should have no shortage of opportunities to participate in cap-and-trade programs. Legislation on pollution and greenhouse gases is proliferating.
There are at least five bills in Congress dealing with carbon trading. Individual states are investigating the use of trading mechanisms. The IMO is under pressure to toughen pollution standards for ocean vessels, which will open up significant opportunities given the high sulfur content of bunker fuel.
Industry participation in cap-and-trade programs isn’t without opposition. Some environmental activists insist that if technology is available to exceed pollution reductions required by law, the standards should be toughened to force all companies to comply.
But Wyman noted that relying only on regulations is a lengthy process, whereas cap-and-trade programs encourage individual companies to take action immediately to accelerate pollution reductions. “We think it’s the right way to go,” he said.
|
