Energy Costs & Savings

Climate Change Legislation:
What It Means to Businesses

Fuel costs will rise for consumers and companies, and even suppliers won’t escape headaches from the increases.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

August 18, 2009

Whether you believe it’s needed or not, climate change legislation is a solid bet. There’s a slim chance it will squeak through Congress this year, but a much greater one that, come 2010, legislation to curb emissions of carbon dioxide will become law.

The impact will be both wide and deep, paring about 2.3% from gross domestic product in 2030.

The costs of fuel and electricity will soar, despite the swift growth in alternative sources of energy, such as solar, wind power and geothermal. New regulations will add as much as 20% to utility rates by 2020. And that’s over and above any increases anticipated from changes in supply and demand. All told, the average cost for residential, commercial and industrial users may be 50% higher than today. In areas such as the Midwest and Southeast where coal fired power dominates, a 100% hike is likely.

Motorists won’t get off easy, either. With climate change legislation, gas pump prices will be about $2 a gallon higher. That will rev up sales of high-mpg hybrids and later, plug-in electric vehicles that use little gasoline, though purchases of cars that use less fuel will be limited initially by high sticker prices.

In addition to electric utilities, numerous energy intensive industries are likely to be walloped: Makers of cement, chemicals, electronics, cardboard and boxes, fertilizer, aluminum, steel, glass and plastics. Also, ore and petroleum refiners, printers, paper and pulp mills, metal fabricators, food processors and others.

Most companies in these sectors will have to worry about cutting their CO2 emissions and will lean on their suppliers to help. That spells headaches for many smaller businesses. To continue as vendors to companies that are directly regulated, suppliers may have to cut the carbon content of what they provide, even though their own CO2 output won’t be regulated by Uncle Sam. Another headache could come from companies that opt to establish their own emissions standards. Wal-Mart, for example, is ramping up a program requiring that its suppliers certify the “carbon intensity” of every product they sell to the retailer. Soft drink giant PepsiCo aims to certify its products’ carbon footprint, measuring the CO2 content from farm to processing plants.

Many businesses will need to rethink their supply chains, not just firms in Uncle Sam’s bull’s-eye. On the one hand, transportation costs are likely to climb sharply, making near-sourcing more attractive for some. On the other, some local suppliers will have to ratchet up prices to offset their own higher regulatory and energy costs. Some may not survive the blow, sending businesses that rely on them scurrying for alternatives. “When a manufacturer closes, its suppliers are adversely affected, and the job losses in turn mean less business for local shops, stores and service providers, possibly imperiling their operations,” says Jeff Holmstead, a former Environmental Protection Agency air quality administrator who now heads up the environmental strategies group with Bracewell & Giuliani, a law and consulting firm.

New and significantly renovated buildings will have to meet tough standards of energy efficiency, using 50% less energy than required for new construction today. New rules should kick in by 2014 for residences and by 2015 for other types of buildings.

Older buildings not undergoing major overhauls won’t be entirely exempt. Overall building efficiency standards won’t apply, but codes for replacement systems or components such as boilers, air conditioners, windows, doors and roofing materials will. Every time something needs upgrading or replacing, the building will get a little more green.

Expect Uncle Sam to offer carrots as well as sticks to cut carbon emissions. Lawmakers are likely to extend or perhaps add to today’s bevy of tax breaks for energy improvements, including weatherizing buildings, replacing equipment with more efficient models and so on. Ditto for incentives for on-site alternative energy production.

But energy cost hikes alone will spur changes. Users will seek savings, installing skylights and windows to cut down on lighting bills, employing sensors to calibrate heating and cooling temperatures, recapturing heat from manufacturing processes, etc.

Plus entrepreneurs and innovators will develop new technologies to assist them. In less than a decade, windows and paper-thin wraps applied to buildings will generate electricity. Power ginned up by wind turbines at night, when breezes are most frequent, will be stored, enabling companies to slash the amount of expensive power they buy during peak demand periods.

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