Business must be aware of the looming effects of the emerging North American carbon markets, counsels Deloitte LLP in a new report.

The firm says that momentum for the development of North American carbon markets continues to grow, “driven by the need to participate in international negotiations to be held in Copenhagen later this year, by the commitments and actions of the new U.S. administration, and by the steady progress of the Western Climate Initiative, among other influences.”

For the United States, a carbon cap-and-trade system is on the horizon, it notes, “as evidenced by President Obama’s budget projections for 2012 onward, which include US$80 billion per year of revenue from government sales of carbon credits. Legislative progress toward such a system continues despite some delays.”

Additionally, at the state and regional levels, a “patchwork quilt” of carbon trading programs has emerged, Deloitte says, “most prominently the Regional Greenhouse Gas Initiative in the Northeast, which began trading in January 2009, and the developing WCI, which spans the western United States and western Canada.”

Canada is developing its own markets, too. The region’s first mandatory carbon market is based in Alberta. Ontario is considering a provincial cap-and-trade program, which would take effect on January 1, 2010, and the federal government has advocated an intensity-based cap-and-trade scheme.

“With the change in the U.S. administration, there are suggestions that the Canadian federal government will focus on developing a cap-and-trade scheme that will be consistent with the U.S. carbon market, in order to avoid the issue of “border adjustments,” which might otherwise be charged on Canadian exports to the United States,” it notes.

All of these initiatives will have significant implications for businesses, it advises, including:

> substantial incremental costs for entities in regulated carbon markets;

> risk considerations, including price risk, credit risk, operational risk, regulatory risk, and fraud risk;

> new governance and organizational issues;

> carbon price impacts on contracting and capital allocation decisions, and asset valuations;

> the need a hedge strategy; and

> accounting policy effects, financial reporting effects, tax implications, and changing transparency obligations.

“As the markets evolve, a myriad of details will need to be considered when formulating how the markets will operate and businesses will participate and report. The uniqueness of carbon regulation and the political environment under which new carbon regulations will go into effect mean that there are no precedents that can be easily copied,” it notes.

“Lawmakers and regulators are putting together complex and inter-related requirements for reporting, tracking, and trading. Now is the time for businesses to be active participants in the market rules formulation — not just to advocate on overall position, but to understand the finer details of how the markets are designed to work and to respond appropriately with comments and observations.”

“All in all, as carbon markets develop in North America, businesses are challenged to manage a wide variety of effects. How nimbly they respond will perhaps define competitive positions in the cap-and-trade era that becomes more imminent with each passing day,” it concludes.

IE