Compliance with California Cap and Trade and Carbon Reporting Legislation

In January 2012 California plans to launch a cap-and-trade program that will cover electricity generation as well as industrial sources that emit 25,000 tons or more each year in carbon emissions. The new cap-and-trade regulation, which will cover some 360 businesses representing 600 facilities, is divided into two phases. The first phase begins in 2013 and will include all major industrial sources along with electricity utilities. The second phase starts in 2015 and will include distributors of transportation fuels, natural gas and other fuels. The goal is to reduce emissions to 1990 levels by the year 2020, and to 80 percent below the 1990 levels by the year 2050.

Under cap-and-trade, companies' emissions are limited, or capped, but the allowances can be bought, sold or traded to allow the firms' operations to continue as emission limits are imposed. Emitters who do not hold sufficient allowances to cover their emissions at the end of each compliance period will be forced to buy more, while emitters who hold surplus allowances may be able to profit by selling or banking what they do not need. The idea is to engage the market place using financial incentives and penalties in order to cut climate-changing carbon emissions rather than through top-down orders from regulators. Each year the emissions cap tightens and the number of available allowances declines, presumably pushing up the per-allowance cost as demand increases. As the cap declines each year, the total number of allowances issued in the state drops, requiring companies to find the most cost-effective and efficient approaches to reducing their emissions.

As there will be a market for greenhouse gas allowances and offsets and a significant cost associated with emissions and non-compliance, companies need to get ready to address compliance. According to Deloitte, companies have three strategic options to consider for dealing with emissions regulations:

  • Basic compliance, doing just enough to satisfy requirements without making major changes to operations.
  • Enhanced compliance, using sophisticated analytics to identify and analyze various options for compliance and portfolio optimization.
  • Moving beyond compliance by managing emissions and other key inputs and outputs, such as energy, water, materials and waste.

In each of these three scenarios, the first step is to understand how the new regulations will affect your business, and when. The next step is to determine if your current emissions exceed the compliance limits, and by how much. Oracle Environmental Accounting and Reporting (EA&R) can provide accurate and complete tracking and calculation of emissions data, along with rigorous internal controls and nimble reporting mechanisms. EA&R guarantees consistency across organizations in how data is collected, retained, controlled, consolidated and used in calculating and reporting emissions inventory. Without the necessary reporting capabilities organizations cannot know if they are truly in compliance.

If their emissions output exceeds the limit, organizations need to find ways to close the gap. That might mean modifying operations or investing in equipment to reduce emissions or simply buying necessary allowances at the prevailing market price to cover anticipated emission levels.

To go to the next level, organizations need to manage allowances with a portfolio optimization strategy, using advanced tools, techniques, and models to increase the returns on allowance investments. Oracle Hyperion Planning and Crystal Ball can integrate with EA&R to support scenario analysis and advanced analytical models. Decisions are driven by risk reduction and cost factors such as price trends, capital cost trends, and accounting and tax impacts. Emissions and allowances are managed as part of an integrated carbon portfolio.

Forward-thinking companies can potentially use the new regulations to gain advantage by moving beyond compliance and positioning themselves in the forefront of a new market, modifying operations to become more efficient and cutting emissions and waste. This approach helps by reducing costs and potentially insulating businesses from unpredictable forces, such as price increases, supply shortages, and new and changing regulations. The necessary step is to develop an enterprise-wide data view that includes all five of the key sustainability categories: carbon emissions, energy, water, materials and waste. Reporting, metrics, disclosures, and internal controls that companies use for emissions, energy, water, materials and waste need to be as rigorous as those for financial data. Thanks to its native integration with Oracle and JDE ERP Financials and Inventory Systems and the capability of capturing environmental data across business silos, Oracle Environmental Accounting and Reporting is uniquely positioned to support a strategic approach to carbon management that drives business value.

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