Amid concerns over resolving the European sovereign debt
crisis, a piece of state legislation was approved October 20 that garnered
little notice. But California’s decision to approve a cap-and-trade system to
reduce air pollution could impact corporate treasury throughout the United
States.
Beginning in 2013 the California cap-and-trade system, the
nation’s first, will allow industrial polluters to trade carbon credits to meet
strict emissions goals, or buy credits if they cannot. Fully 85 percent of
California businesses must be in compliance by 2015.
The passage of cap-and-trade in California is important to
corporate treasurers nationwide for two reasons. First, because California is
the world’s eighth largest economy, many states tend to follow the state’s
regulatory initiatives. What’s more, treasurers and chief financial officers
are likely candidates to oversee their organization’s cap-and-trade efforts.
“While companies might not have direct customer
relationships in California, they may have indirect customer linkages,” said
James Balsan, Managing Director of Environmental Innovation Solutions with BNY
Mellon. “Companies will need to look through their supply chain for
California-based vendors as well.”
Balsan, who spoke at AFP’s 2010 Annual Conference on
cap-and-trade, noted that consumer electronics and household appliance
efficiency standards that were first mandated in California became de facto
national standards.
“Manufacturers realized that it was easier to build one
model with the higher efficiency for the entire market than one for California
and one for the rest of the U.S.,” he said. “We are starting to see that in
auto manufacturing too.”
Currently in California, the chief operating officer handles
most of the emission measurement reporting duties, said Balsan. But that will
change in 2013. “The vast majority of these reporting responsibilities did not
have direct financial implications,” Balsan explained. “Now, there will be
direct financial liabilities created by the reporting. Reporting,
forecasting and financial planning will now involve at least the staff of the
COO and the treasurer/CFO. They’ll have to set aside funds for auctions to
purchase carbon offsets, forwards and other hedges.”
Bank of America Merrill Lynch has already established a
department to help companies prepare for cap-and-trade. Wells Fargo, HSBC and
Citi also are looking into offering cap-and-trade groups.
Here is an overview of the California cap-and-trade system.
Balsan wrote about
cap-and-trade in the September 2011 issue of Exchange.