Cap and Trade: What It Is and How It Affects Us

Abstract

Public Policy Focus - Cap & Trade: What it is and how it affects the oil industry and you. Beginning with this edition, TWA is adding a section titled Public Policy Focus. Articles herein will explore, in the broadest sense, the interactions between governments and oil and gas companies. Topics may include legislation; concessions made by national governments to companies for E&P activities; other national-government actions that affect oil and gas companies; and global initiatives, including climate-change and other environmental policies. Articles will explain the details of the policies under discussion and examine the impacts on the industry. The environment has been at the forefront of global public policy debate for years. Many oil companies support government action to protect the environment, and these same companies have adopted stringent environmental policies of their own. At the same time, the petroleum industry has also been vocal in its concern that environmental laws—chiefly those that would limit carbon emissions—treat the industry unfairly and could detrimentally affect their competitive edge in the global economy. So how will carbon-limiting laws affect oil companies and you? Emissions-trading schemes, popularly known as cap-and-trade programs, have two primary parts. The cap refers to limiting, or capping, the total amount of carbon dioxide emissions. This is accomplished through the issuance of emissions credits, or carbon credits, which are permits to emit a certain amount of CO2. For each carbon credit a company possesses, the company is allowed to emit 1 ton of CO2. The trade part of the program refers to the ability of companies to buy and sell carbon credits in an open market, thus allowing “cleaner” companies, those which have lower carbon emissions, to sell unused carbon credits to “dirtier” companies. The credits sold are a revenue stream to the cleaner companies and a cost stream to the dirtier companies that buy them. Thus, the goal of cap and trade is to provide a powerful economic incentive to all industries to lower total carbon emissions.