By Guest commentary Friday, May 31st, 2013

[EDITOR’S NOTE: Please see correction at bottom of article.]

By Paul Hullar on May 31, 2013

California’s Global Warming Solutions Act of 2006, also known as AB32, is generally regarded as unfriendly to businesses. However, as with many regulations, there will be winners and losers. There are currently more than 360 businesses with more than 600 facilities that must report their emissions to the California Air Resources Board, or CARB.

Next year, these businesses will have three options: reduce their CO2 emissions, purchase credits (called“allowances” or “offsets”), or pay significant fines. Herein lies the difference between the winners and the losers in the world of Cap and Trade.

In a truly amazing event, CARB held its first cap-and-trade auction in November 2012, when businesses could purchase CO2 allowances. In essence, these auctions are the sale of indulgences, allowing businesses to purchase units of emissions in order to avoid fines at a later date.

What is so noteworthy is that businesses ponied up nearly a quarter of a billion dollars in one day because they believed that paying money to CARB was their best option. With four scheduled auctions each year, there will be nearly $1 billion dollars conveyed in this new cap-and-trade process to the State of California. However, it is through the private version of this process that the AB32 winners will emerge.

Of the three options available, no business would ever intentionally pay the stringent penalties, or fines, as willful violations can climb to $1 million per day, according to CARB. Rather, these businesses will purchase annual “allowances” and “offsets,” year after year. They will become slaves to purchasing their indulgences.

The rules that allow for winners and losers occur through the credits that can be traded either at the CARB auctions as “allowances” or between private parties as “offsets”. In order to win in this game, a business should never buy CO2 credits to avoid fines, but should instead work to sell them for profit.

Let’s use an example of a typical tri-county manufacturing company that is generating 100,000 metric tonnes of CO2e (MTCO2e) with a mandated reduction of 20 percent. At the current auction price of $15.60, its annual cost is $312,000. Next year the firm will need to do this again, as an allowance is issued only for a single-use emission. And with any supply and demand commodity, as the caps tighten, the demand on the trades will increase.

The winners will be the businesses that implement a sustainability program and reduce their CO2 emissions beyond what is regulated. A comprehensive sustainability program can successfully reduce energy usage by 25 percent to 40 percent and reduce the carbon footprint by 70 percent, all with an attractive rate of return.

It’s not about hugging trees — it’s about increasing the profits and growing the business.

The key to doing this is implementing a sustainability program instead of just executing sustainability projects. Smart company leaders already know this; others will figure it out too late. The real winners will be the businesses with enough vision to set goals well beyond the AB32 requirements, and then monetize the reductions. Yes, monetize the reductions. That’s the key to winning.

The winners will sell their CO2 reductions as offset credits to other businesses, creating a new revenue stream for themselves. Once they understand how to use this new revenue stream as part of the financials in their own sustainability program, the revenues can be used to fund expanded programs, creating even more revenue streams.

These businesses will quickly learn that, by executing a successful program once, they can create recurring CO2 offsets that can be monetized year after year.

The losers will stand in line to buy these offsets, and once the game gets going, it will be too late for them to do much of anything else; the winners will be all too happy to sell them salvation. Legislation and regulations come and go, but saving money never goes out of style. The businesses that choose this strategy are the real winners. And you can take that to the bank.

• Paul Hullar is the owner of Simi Valley-based Brightwave Energy. Hullar helps companies reduce costs through energy conservation and the use of alternative and advanced fuels.

[CORRECTION: This article previously misattributed this article to business consultant Emily Barany. Paul Hullar, a client of Barany’s is the author.]