Tuesday, October 27, 2009

Pending Federal Climate Change & Energy Legislation

First, a general primer on the relationship between Federal and state laws. Federal laws set baseline standards that must be meet nationwide. States can set standards that are higher than Federal standards, but cannot set lower standards.

Comprehensive Federal energy and climate change legislation is coming. It is not law yet, but is merely in the mid-stages of discussion. Therefore, the details of what a final comprehensive Federal law will look like is uncertain. However, views of how the law should look can be found in various proposals including the American Clean Energy and Security Act, American Clean Energy Leadership Act, and the Clean Energy Jobs and American Power Act.

Federal standards for energy consumption in buildings, transportation, and consumer products will have a wide reaching impact across the US - especially in states that currently lack up-to-date energy standards. Moreover, Federal climate change legislation will create standards where state standards are almost entirely lacking.

Regardless of the form it takes, Federal energy and climate change legislation will create energy and climate standards that must be met nationwide. Compliance with these standards will cost money. These costs will be passed on, in various forms, through every corporation, non-profit, and governmental unit to every US citizen. These costs are projected to range from hundreds of dollars per person per year to thousands of dollars per person per year, depending on a wide range of assumptions.

Critics of comprehensive energy and climate change legislation argue that the costss are unnecessary and unreasonable - especially because they would be passed on in the form of higher prices for consumer goods and services, yet consumers would not see any tangible day-to-day benefits to justify higher prices for the same basket of goods and services as before.

However, data-driven scientific analysis shows that the price of delayed action on energy and climate issues would be far more costly.

For example, a noted study on the global impacts of climate change suggests that the costs of continuing to waste energy, and continuing to rely on fossil fuels, could equal between 5% and 20% of global GDP each year. These costs are generally associated with changes in the availability of resources like water, land, food, trees, and air. In contrast, the cost of taking action now to avoid these impacts would be around 1% of global GPD. The weight of the evidence contained in the broad body of other scientific studies supports similar conclusions.

A rational organization will run an NPV analysis of the costs and benefits of compliance with Federal energy and climate laws as compared to the cost of lost business opportunies (which in the aggregate results in lower national and global GDP) in going forward without these laws. Among other things, it will also adjust for the value of having a brand that the public sees as socially responsible - a value which is difficult to quantify but that has unquestionable value.

Many companies have performed this analysis and determined that it is in their best interests to support Federal energy and climate legislation even though it will impose short term costs that pinch the bottom line.

For example, Dow Chemical Co., Entergy Corp., Nike Inc., and hundreds of other Fortune 500 companies showed their support for the legislation during a recent lobbying effort on Capitol Hill. Additionally, there is the widely publicized withdrawal of Apple, Excelon, PG&E, PNM Resources, and others - who arguably have little to gain from Federal legislation - from the US Chamber of Commerce which opposes this legislation.

How can an organization mitigate the increased costs of energy and climate legislation? It's first step must be to reevaluate the way it uses energy. What gets measured gets managed - therefore, energy benchmarking is key. Once an organization understands its energy use patterns - the electrity that powers its lights, the fuel that delivery trucks burn on their routes, the amount of unused water that goes straight down the drain - it can take action to reduce this waste.

By minimizing waste, an organization can minimize the costs it incurs in complying with impending Federal energy and climate legislation, and thereby minimize the associated costs that it has to pass on to its customers.

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