As the House inches closer to an agreement on a cap-and-trade bill, what business and growth opportunities exist within the U.S. carbon market? During today's OnPoint, Dirk Forrister, former chairman of the White House Climate Change Task Force during the Clinton administration and current managing director of Natsource, a carbon market finance firm, explains how international carbon markets have been affected by the economic downturn. He discusses opportunities within the growing U.S. carbon market and also talks about the main hurdles facing the Waxman-Markey climate bill as it makes its way to the House floor.

Transcript

Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. Joining me today is Dirk Forrister, former chair of the White House Climate Change Task Force during the Clinton administration and currently the managing director at Natsource, a carbon market finance firm. Dirk, it's great to have you on the show.

Dirk Forrister: Thanks Monica, it's good to be here.

Monica Trauzzi: Dirk, we've seen major issues with financial markets recently and there's a lot of insecurity relating to investments. Do we need to look at the carbon market differently as a result of the financial downturn? I mean how is the carbon market impacted?

Dirk Forrister: Well, I think in most respects it ought to be treated just like other markets because it does have the same fundamental elements to market activity. It is special in that government is involved in issuing of allowances and issuing offsets. But the fundamental rules should be the same. It is a strange time to be designing a market, but I think members of Congress can take comfort in the fact that carbon markets have actually performed fairly well through the troubled times in recent years or recent months.

Monica Trauzzi: It doesn't look like there will be a final agreement this year at the UNFCCC meeting in Copenhagen. What impact does that lack of certainty regarding a post-Kyoto agreement have on international markets?

Dirk Forrister: Well, it has a major impact for the long term. I think existing markets probably have more focus on what the domestic rules are for implementation, for example, in the European trading program or a U.S. cap-and-trade program. But I'm also optimistic that enough of the architecture will be present to give us a sense of the direction things are going. There may be a lot of detail to be worked out in subsequent negotiations, but I think there's still room for the broad brush strokes to be agreed in Copenhagen.

Monica Trauzzi: So, let's talk about the action we're seeing in Congress in the U.S. on climate. The Waxman-Markey bill has made its way through the Energy and Commerce Committee and it's now being considered by a handful of other committees. What are the main hurdles that you see this bill facing as it makes its way through these other committees?

Dirk Forrister: Well, I think the Ways and Means Committee is pretty active right now looking at the allocation provisions and at the way some of the rebates to consumers work. The House Agriculture Committee has certainly taken a look at some of the provisions related to agriculture and to market oversight, so the fuel standards or the potential definition of biomass and the role of agriculture in the offsets market. But I'm optimistic that the committee chairman can work out agreements on a number of these elements so that they could be handled in a manager's package as it moves toward the floor. But there could also be a few amendments considered on the floor of the House.

Monica Trauzzi: Obviously, the role of offsets has been a major point of discussion. How big of a role should they play moving forward? I mean there are some serious concerns about the environmental benefits that they actually provide and how credible they are. How big of a role should they play?

Dirk Forrister: Well, I think they're probably the biggest hitter in terms of delivering cost-containment benefits and certainly as you look at U.S. domestic implementation it does provide a way for us to involve farmers and ranchers in delivering benefits from our large land mass. So, I think they could play a fairly major role going forward. They're also very important diplomatically. I think the U.S. delegation negotiating in Copenhagen will make a lot more friends toward U.S. positions if access to U.S. markets is a part of the equation. So I think they're very important.

Monica Trauzzi: By the speaker's deadlines, Speaker Pelosi's deadlines for the Waxman Markey bill feasible? She wants to have all the changes by June 19, moving very quickly in getting this to the floor. Is that feasible?

Dirk Forrister: Well, I think it's possible. I think it might slip by a week or two, but I don't expect it's going to slip a whole lot just because the House has so much other important business to get to and it's climate change opportunity time now and I really do think they're going to stick to their guns and try to move that bill through the House floor.

Monica Trauzzi: In the work that you do at Natsource, what have you seen in terms of company's ability to actually spend money and finance projects and developments that are environmentally friendly? Have companies been paring back on those investments?

Dirk Forrister: Well, most of the money that Natsource has been investing has been aimed at compliance instruments that would be valid in Europe and hopefully valid in the U.S. We don't know that yet. And it does get complicated as you look at the outer years of those investments because we don't have clarity on what the international agreement is going to be. We're starting to get more clarity on what the U.S. involvement in that would be, but still, it does limit the amount of market appetite there is for post-2012 emission reductions.

Monica Trauzzi: So, what do you see as the outlook for Natsource? What opportunities do you see for your company in the U.S. carbon market?

Dirk Forrister: Well, the U.S. market creates some vast new possibilities and I don't think people appreciate, around the world, how dramatically different this program is to existing emissions trading programs. The U.S. program cuts across many more sectors, notably the transportation sector, which is 2 billion tons a year. And just to give you a frame of reference, the core of the European market is the power sector, which is about 1.1 billion tons per year of emissions. So just our transportation sector is almost twice what the core of the European program is. Then if you add other sectors to it, notably the power sector and energy intensive industries the U.S. market is going to be the biggest market in the world, so it creates vast new opportunities. It also creates a lot of possibilities for doing things differently with farmers and ranchers and agricultural sequestration projects, forestry projects that have, up until now, not really been tapped on a global basis.

Monica Trauzzi: You recently wrote about carbon tax versus cap and trade. A lot of people feel that a carbon tax would be a much more streamlined, easy approach to reducing emissions. Why do you think that a cap and trade is better and why wouldn't a carbon tax work as well in the U.S.?

Dirk Forrister: I just like the environmental certainty that you get with cap and trade. You know that you're going to deliver the environmental benefit rather than trying to tweak with a tax rate in hopes that you might indirectly reduce emissions. So, it provides the certainty. It also provides a mechanism for getting those emission reductions at the lowest cost. And, fundamentally, that's the advantage that cap and trade has. I bring a unique perspective to this because I actually have paid carbon taxes. I live in Boulder, Colorado, where I pay carbon taxes that don't really have much effect on emissions there. They just create pots of money that the City Council can spend on green initiatives. That's a good thing, but it's not effectively reducing emissions to cap levels.

Monica Trauzzi: Final question here. What's your take on what President Obama has done so far on energy and the environment? He's wanting to implement the millions of green jobs, renewable energy. Is that enough to take place for the lack of legislation?

Dirk Forrister: I don't think it's a substitute for the cap and I don't think the president thinks that either. I think these are reinforcing mechanisms and I like the idea of all of the oars in the boat pulling in the same direction for a change, because we haven't really had a dedicated national effort focused at reducing emissions and changing our infrastructure and creating a whole new type of jobs for Americans. And so I think that's a laudable goal and it's a very good thing that they're moving these things in a way that reinforces the overall goal.

Monica Trauzzi: OK, will end it right there. Thanks for coming on the show.

Dirk Forrister: Thank you Monica.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

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