The Investor's Guide to Clean Energy

In a Thursday morning last September, a group of environmental experts and government officials came together at the New York Mercantile Exchange in downtown Manhattan to witness a groundbreaking event. When the opening bell rang, carbon dioxide went on sale for the first time in the United States. Now, NRDC is getting ready to push this critical strategy for combatting climate change one step further with Cap 2.0, a set of policy regulations centered on cap and trade.

In a cap-and-trade system, the government puts limits on the amount of carbon dioxide that can be emitted into the air by industry, including major polluters such as the coal and cement industries as well as paper plants. If a company plans to emit carbon dioxide, it must buy a carbon allowance, usually measured as one ton of CO2. After the initial cap is set, the amount of carbon sold is reduced annually, which lowers total yearly CO2 emissions. The price of carbon allowances is determined by the market: as the demand for carbon increases (because the number of allowances is reduced by the government), the price will rise. If a company buys more allowances than it actually uses, it is free to trade the excess polluting rights to other businesses. In the case of the September auction, a consortium of 10 northeastern and mid-Atlantic states, including Maryland, Massachusetts, and New York, sold off 12.6 million allowances of carbon dioxide, earning the state governments a total of $40 million. A national carbon auction could generate at least $100 billion each year, according to climate experts and economists. Where should all this money go? That's where Cap 2.0 comes in.

Cap 2.0 steers policy makers to invest auction proceeds in clean energy solutions, such as research on sustainable biofuels, as well as to offer monetary incentives, including cash payments to companies that come up with innovative technologies. This so-called cap-and-invest scheme is not new, but NRDC proposes a much more robust approach: investing 60 percent of auction proceeds in the development of a dozen sectors of the new green energy economy.

"Simply putting a price on carbon will not reduce emissions as cheaply as possible," says Rick Duke, director of NRDC's Center for Market Innovation. "Building a clean energy economy also means offering incentives for efficiency and low-carbon innovations."

To launch Cap 2.0, NRDC will publish 12 policy briefs (nrdc.org/globalWarming/cap2.0/). Each brief will focus on a different sector of the economy-for example, transportation, energy efficiency, or renewable energy-that could benefit from an infusion of funds from auctioning carbon. For instance, in the area of energy efficiency, auction revenue could provide low-rate, government-backed retrofit loans that would allow small businesses to install energy-saving heating and cooling systems. Auction revenue could also be used to support the development and deployment of renewable energy, such as solar and wind power, until these technologies begin to pay for themselves.

This all sounds great in theory. But given the economic crisis, is it really the time to ask businesses and industry to cough up additional dollars for carbon allowances? And should the American consumer be saddled now with a short-term jump in energy costs?

"Any legislation enacted today won't be implemented until 2012 at the earliest," says Andy Stevenson, a former hedge fund manager and a financial adviser at the Center for Market Innovation. "Moving forward now on legislation will not raise today's prices at the pump for consumers."

Indeed, climate legislation could stimulate the economy by creating new jobs in the growing green energy sector. In addition, a bill that promises a long-term commitment to government incentives and subsidies for new technologies-say, hydrogen batteries-will give investors confidence. "As soon as a bill is passed, it will solve investors' current dilemma as to where they should put their money," Duke explains. Sophisticated modeling to analyze the economics of Cap 2.0 policies will also be released in the coming months. The results will allow policy makers to project with more accuracy how many jobs will be created with a cap-and-invest system, as well as how consumers' utility bills may be affected.

As Capitol Hill and the Obama administration prepare climate change legislation this spring, NRDC will begin working with congressional leaders, the White House, and other environmental groups in an effort to make sure that Cap 2.0 policy becomes a centerpiece of the new bill. "There's a huge cost to move from twentieth-century to twenty-first-century energy," Stevenson says. "Recycling carbon revenue will allow everyone to make this transition."