B OF A WANTS CAP-AND-TRADE

Even among conservative business leaders there are very few climate change deniers who believe it is not necessary to control greenhouse gas (GhG) emissions.

Economists insist the best way to put a price on emissions is via a tax but businessmen and politicians know a new tax is not politically possible. The next best option, already chosen by the EU, is a cap-and-trade system.

The U.S. Senate is in the process of designing such a system and enacting a law requiring it. Each business/manufacturer would be assigned credits to emit an allotment of GhGs. Some percentage above the assigned credits could be purchased at auction. Each business or manufacturer then would either meet the cap or purchase credits to emit more GhGs in an emissions trading market from businesses or manufacturers with excess credits.

Bank of America CEO Ken Lewis recently called on Congress to enact such a trading system. Did the bank suddenly become a treehugging softie? No. Expert consultants New Carbon Finance estimate the market value of emissions trading could be $1 trillion by 2020. That kind of financial opportunity, B of A realizes, is undeniable.

With the opportunity comes the responsibility. Business will soon need to account for the cost of GhGs. Lewis: "We favor a market based mechanism to set a value for carbon allowances, and a clear, federal standard that would give investors the certainty they need to plan for the future…When innovators and financial backers are confident of government support, risk calculations change and good things happen…"

When a heavy hitter like B of A decides it's time for cap-and-trade, it's likely to happen. Might the banks think the new market will ease the subprime crunch? (click to enlarge)

BofA CEO Calls for Cap-And-Trade System to Regulate Carbon Emissions
Leva M. Augstums, February 12, 2008 (AP via Yahoo Finance)
and
U.S. carbon trader could be $1 trillion
February 15, 2008 (UPI)

WHO
Ken Lewis, CEO, Bank of America Corp.; New Carbon Finance, a division of New Energy Finance

WHAT
Bo A CEO Lewis called on Congress to pass cap-and-trade legislation to create a more stable, predictable power market for business. A report by New Carbon finance predicts the cap-and-trade legislation will create a domestic emissions trading market that could be worth $1 trillion.

The Senate will begin sorting out competing cap-and-trade proposals this spring. The decision is not likely to come until after the November election. All 3 major presidential candidates support the concept. (click to enlarge)

WHEN
- The $1 trillion market value is likely to be reached by 2020.
- Bank of America Corp joined the Chicago Climate Exchange (CCX) in 2007, taking on voluntary carbon capping and a commitment to offset GhG emissions above the voluntary cap. In March, the bank launched a marketing campaign to draw customers into an environmentally friendly banking program and this month formed a team focused on identifying climate change-fighting investment opportunities.
- The EU was first into the cap-and-trade system and the EU ETS is presently near working out many of the problems with establishing an emissions marketplace.

WHERE
Lewis spoke at the Institute for Emerging Issues forum, at North Carolina State University in Raleigh, NC.

WHY
- B of A estimates the cost of GhG emissions will be $20 to $40/ton of carbon dioxide equivalent (CO2e) absent government intervention.
- There are 13 varying proposals for a cap-and-trade system currently before Congress.
- B of A’s participation in the CCX and its marketing programs addressed to environmentally concerned investors indicates the way climate change fighting and emissions trading can be profitable.
- The U.S. emissions trading market is likely to be twice as big as the EU ETS and price GhGs at $40/ton of CO2e by 2015.

Emissions credits have traded at high volumes in the $15 to $25 dollar range on the EU ETS during the last year. (click to enlarge)

QUOTES
- Lewis: "Like any large, important, transformative project, this one is going to require a lot of money…I'm guessing that's why you invited me."
- Lewis: "There are a lot of great ideas out there…This fact creates a huge risk management challenge for banks ... as a financial backer of new technologies, the bank is in the position of picking winners and losers."