Report highlights US cap-and-trade winners and losers

The power sector is likely to top the list of both winners and losers if a proposed cap-and-trade system for greenhouse gas emissions in the US comes into existence, according to Point Carbon.

While Atlanta-based power company Southern Company would suffer the most as a single entity under a federal cap on carbon emissions, Exelon Corporation is likely to profit, according to research from Point Carbon.

The findings come from its latest report, Carbon exposure, unveiled today at the Carbon Market Insights Americas conference in New York. It identifies the major market participants under a US federal carbon cap-and-trade scheme, and quantifies the financial effect of a carbon cap on each of them.

The analysis uses the scope and structure proposed under the Kerry-Boxer bill (S 1733) being examined in the Senate.

“Now we can begin to see which firms would have larger market share and corresponding ability to move carbon markets,” says Emilie Mazzacurati, head of Point Carbon’s North American research division. “We can also see which companies will remain financially attractive, and which will be more exposed to carbon risk.”

The power sector contains the most vulnerable companies. In addition to Southern Company, this includes American Electric Power (AEP) and Duke Energy, according to Point Carbon. Assuming a carbon price of $15 for the first few years of the scheme, it found compliance could cost Southern 12% of its operating income, AEP 11% of its operating income and Duke 5% of its operating income.

AEP is the largest electricity company in the US and emits less than half of ExxonMobil’s emissions. But its gross cost of carbon – total emissions multiplied by the price of allowances – would be $2.3 billion, while Southern Company’s would be $2.2 billion.

“This information might entice some companies to explore pre-compliance strategies such as offsets now, as that might reduce costs later,” says Mazzacurati. “If the more vulnerable companies were to do this now in a thorough and strategic manner, they could hedge their exposure considerably.”

However, Point Carbon expects AEP to recover 90% of its net carbon cost through carbon revenues – that is, “the carbon pass-through”, or how much of the cost of carbon is passed on to consumers through an increase in retail prices.

The research also found that certain power companies would gain under the proposed cap-and-trade system. The final cost of carbon for Exelon is a net gain of more than 36% of its operating income. This is due to its large portfolio of low-emission power generation facilities.

According to Point Carbon, the volume of emissions or the nominal size of compliance costs are not positively correlated to the financial impact on a company. For instance, ExxonMobil is the largest emitter in the US, accounting for more than 6% of all US emissions. Yet ExxonMobil’s operating income will be only slightly affected under the system.

Again assuming a $15 carbon price, ExxonMobil would need to pay $5.9 billion annually to purchase the required amount of carbon allowances – 8% of its operating income. However, Point Carbon estimates it could recoup $5.6 billion in carbon revenues through a small increase (5%) in gasoline prices. This would leave its final cost of carbon at $277 million and result in a small gross carbon cost compared with its operating income of $84.1 billion.

Point Carbon has estimated that a $15 carbon price would translate into a $0.13 increase per gallon of gasoline. This increase would be negligible compared with gasoline price swings caused by volatility in oil markets. As a result, oil companies of comparable size would fare similarly under a US system, according to the research.