The green marketplace has been expanding rapidly under pressure from legislation and public demand. The nascent markets and regulations that have emerged as a result of the world’s fight against climate change are as varied as they are broad. In order to gain insight into the supply and demand issues of such a complex new global market, VerdeXchange was pleased to speak with Weston Heide, senior manager of Global Energy Markets for financial advisory firm Deloitte and Touche.
The price of energy is obviously a function of supply and demand. What is Deloitte’s assessment of the global supply and demand curve for energy today and going forward?
At this point, most of what we see is consistent with conventional wisdom. There is a tremendous and rapidly growing demand for energy across the globe. We see that the demand for energy will continue, especially in high-growth markets like China. Meeting this demand will require a broad range of solutions from the supply side including traditional sources of energy and new and alternative sources of energy. We will also need to utilize energy more efficiently.
How has increased public awareness of the effects of carbon-based energy on global climate change affected energy markets? Has the supply side of the energy curve become more uncertain?
Across the energy spectrum there is an increased awareness of climate change, its implications, and the potential impacts on the dynamics of the energy markets. There’s a necessity for the energy industry, across the board, to address these issues. From a supply side, this has created an environment in which significant interest and investment is directed towards new and alternative energy solutions, and cleaner, more efficient deployment of existing energy sources.
But public opinion is shaping the acts of legislators. Has that affected the type of investments being made in energy alternatives?
Public interest in climate change is contributing to an environment under which regulators are moving in the direction to create policy and regulations to address climate change. In the United States, this is happening in a disparate fashion, for example with California legislation under AB 32, the RGGI program in the Northeast states, and several bills introduced in Congress.
If you think through a logical progression, you can see the impetus for legislators: scientists are in agreement; investors sense the opportunity, and the risks; public awareness and interest is accelerating; and legislators and regulators are deliberating the range of appropriate solutions. This situation has created a new dynamic for the energy industry.
Importantly, the influence and interest of the investment community is contributing to this tremendous opportunity. Investments in the clean tech sector were around $50 billion last year and are projected to reach over $200 billion with the next ten years. Additionally, the global traded carbon market topped $25 billion last year. There is a confluence of factors contributing to investors’ interest in the opportunity. But they also see some risks, so they’re being mindful of their investments.
The price of energy, including oil, is currently one of the strongest incentives to pursue alternatives. Do you see price becoming more of an influence on the movement toward alternatives, and where do you see those alternatives coming from?
Oil prices have moderated in this $60–70 range for a while and we are probably in a period where that is going to be the norm. There’s not necessarily a one-to-one correlation between that price and the movement towards alternatives, although it is one contributing factor. I think the movement toward alternatives is here to stay, and there are several important drivers that are influencing the growth in alternative energy sources. Security of supply; economic development; environment and sustainability; technology and innovation; and incentives and subsidies; these have all influenced the development of alternative energy solutions. The price of energy does factor into the equation as well. However, many alternative sources are currently more expensive than traditional sources, so other drivers are clearly at play.
I think we will see these alternatives come from a variety of sources – from wind, solar, and biofuels to innovations in fuel cells and hydrogen. We will also see increased innovation and deployment of clean alternatives for coal. Overall, there are several factors that will keep the alternative energy industry moving along at a very healthy pace.
In terms of public policy, some have claimed that the carbon tax is the best, most efficient, and cheapest way to combat the causes of climate change. What are the benefits or shortcomings of that system?
That brings up an interesting debate because regulators and legislators have several options to address carbon. Among the benefits of a carbon tax are that it’s a straightforward tool, it’s relatively easy to implement and administer, and it provides a transparent price for carbon. However, there are several challenges as well. Absent other policy, a carbon tax does not provide a cap and reduction schedule for absolute emissions – necessary conditions to address climate change. Also, a carbon tax can create a local impact in context of a global problem and could potentially lead to artificial competitive advantage if you don’t have a level playing field. Lastly, tax is always a difficult term to make its way through legislators.
One of the policy alternatives that captures a lot of attention is a cap-and-trade program. This approach is one of the leading alternatives under development today. It is attractive to legislators and regulators for a variety of reasons. First and foremost, it provides a mechanism to reduce overall emissions at the lowest economic cost. For individual companies, it provides flexibility in their options for mitigation. And it mobilizes capital to clean energy and emissions-reducing technologies.
As you mentioned, an alternative to a carbon tax is cap and trade. Under this system the government decides how many tons of a given greenhouse gas can be emitted statewide and passes out credits to the emitters. This approach has appeal across the spectrum of stakeholders, especially in Europe. But some are critical, for example, the Los Angeles Times editorial board, who in a May editorial contended that when this system was introduced in Europe in 2005 it was too generous with credits and not stringent enough in guarding against cheating. What is your opinion of that critique?
I haven’t read that specific editorial, and I don’t want to take anything out of context. The key concern raised relates to one of the fundamental elements of cap-and-trade programs: the distribution of allowances. This is one of the key things that regulators are trying to determine right now. Government grants of allowances, as you mentioned, is one mechanism for allowance distribution. Auctions present an attractive alternative that has gained a lot of traction. For example, all indications for California and for RGGI are that a portion of allowances will be auctioned.
I think the challenge that the editorial is referring to stemmed from the National Allocation Plans, which determine the allocation of allowances for the EUETS. For Phase I of the EUETS, these allocations were arguably too generous and they exceeded the emissions for the covered installations. Thus, the market was long on allowances, driving down the price. As we approach Phase II of the EUETS, we see a tightening of allowances through a more rigorous evaluation and approval of the National Allocation Plans. I think they are in the process of better understanding what the right level is to set those allocations so that they can achieve the objectives and targets of the program.
How will energy efficiency measures affect energy markets? And are there other regulatory practices, such as tax incentives, that can help maintain a productive economic system while fighting climate change?
Energy efficiency measures are one of the most appealing and most dramatic ways that we can, as a society, make a significant difference. California provides an excellent example, with significant efforts over the past two decades to enhance and enforce energy efficiency standards. From a federal level, the Energy Policy Act of 2005 contained a number of provisions related to energy efficiency. Energy efficiency is definitely one part of the solution. Often times, energy efficiency measures take a little bit longer to yield results and there can be network and other externalities associated with these measures that can be challenging. Energy efficiency alone, however, will not solve the comprehensive issue at hand.
Another thing to look at, as you mentioned, are tax incentives. Tax incentives and subsidies currently have a significant influence on the renewables sector such as wind, solar, and biofuels. They are very good for spurring research and development, for accelerating the deployment of technologies, and for bringing projects to commercial scale. I think a well-designed approach to tax incentives and subsidies will continue to help the industry move forward.
How has the global interest in climate change and renewable energy over the last few years impacted your work with Deloitte?
We have seen a tremendous amount of interest in the climate change and renewables industry. I’m part of Deloitte & Touche LLP’s Global Energy Markets Practice, a group that focuses on providing strategic, operational, technology, and accounting services for the energy industry. I focus specifically on climate change and alternative energy. From a high level, we view climate change from three standpoints: First, we focus on strategy, helping companies address climate change strategy, governance, and risk management (climate change risk, broadly, and the risks and challenges associated with emissions trading, specifically).
From an operational perspective, we help companies address the business processes and systems required to manage the operational components of their business related to climate change such as emissions trading, greenhouse gas inventories, reporting and compliance with different registry programs, or establishing management reporting infrastructure.
Thirdly, we work with companies on the accounting practices, specifically related to emissions trading. In cap-and-trade programs for emission allowances, there is still uncertainty and a lack of a definitive guide on how the accounting treatment should work.
If we were to have an interview with you in another year, what would be the focus of our conversation?
I think we will be much more engrossed in a discussion about what climate change and carbon regulation will look like on a federal level. I think we’ll continue to talk about the interest, momentum, and exciting new technologies in alternatives and renewables. I think we will continue to see an increased movement in energy efficiency through things like the Green Building Council, fuel economy for vehicles, and others. And I think you’ll begin to see more interest in developing traditional energy sources in a more clean and efficient manner. For example, for coal-fired power plants, there are a number of new technologies that are being developed and deployed at a pilot stage and moving towards commercial scale. The innovation for “clean coal”, whether through Integrated Gasification Combined Cycle (IGCC) or through other post-combustion capture technologies, will continue.