Congress recently introduced a piece of environmental legislation known as the American Power Act (APA) – a bill that could potentially have a large impact on food & beverage processors.
Similar to the previous carbon-related bills (Waxman-Markey and Boxer-Kerry), the APA would implement a carbon cap-and-trade market, holding businesses accountable for greenhouse gas emissions. If passed, the bill will require food processors to gain a better understanding of how their carbon profile might affect their business operations and bottom line.
Simply put, a cap-and-trade market places a limit on the amount of greenhouse gases that can be emitted by industries and creates a fee-based allowance for every ton of carbon emissions produced by energy users. Under the current version of the American Power Act, larger companies that emit more than 25,000 metric tons of CO2 would be required to comply with carbon regulations and purchase allowances to mitigate their carbon emissions.
Companies can acquire allowances in two ways: by auction or free allocation. In the first 10 to 15 years of the American Power Act, approximately 85 percent of emissions will be freely allocated, thereby helping alleviate companies of the immediate costs. The remaining 15-20 percent of allowances will be auctioned. Once a market is established, companies will then be able to buy or sell their allowances as needed to account for their varying levels of carbon emissions, or purchase carbon offsets for a percent of their compliance needs.
While not every food processor will be directly impacted by the potential carbon cap-and-trade legislation, it is important to note that there are indirect costs for all energy end-users, regardless of their size of operation.
Under the current version of the APA, larger manufacturers emitting more than 25,000 of CO2 would be required to comply with set regulations and purchase allowances. The estimated cost of carbon allowances are between $12.50 and $15 per metric ton and could increase 3-5 percent each year.
Small to mid-sized food manufacturers that emit less than 25,000 metric tons of carbon are more likely to be impacted by the APA in an indirect manner. For example, beginning in 2013, the utility and energy generation industries will be required to account for carbon emissions. To recoup the cost of purchasing the required allowances, utilities will likely pass the cost to its users in the form of higher energy rates. So while small to mid-sized manufactures may not have to purchase carbon allowances, they should prepare for a potential 10-15 percent increase in energy prices.
Large food manufacturers can reduce carbon emission levels through improvements in energy efficiency. As such, the “low hanging fruit” projects should be the first action item for food processors looking to reduce costs. These include high-efficiency lighting, boiler retrofits and compressed air upgrades. In order to reduce usage even further, more capital-, labor- and technology-intensive projects may have to be undertaken.
Food processors that must comply with the carbon cap-and-trade also can gain carbon offsets through renewable energy projects. Carbon offsets can be sold to companies that need to purchase carbon allowances to account for their higher CO2 emissions. For instance, a dairy manufacturer currently using a methane capture system to generate renewable energy to power its facility would be granted a certain number of carbon credits. These credits could be sold to a larger company in need of carbon allowances at a discount to the current market price, making money for the dairy manufacturer and creating an incentive for more projects while helping the larger company mitigate its emissions.
How should food processors prepare?
While the details of the APA are still being debated and nothing has passed through Congress, it is more likely than not that some form of carbon legislation affecting food processors will be passed in the near future.
In order to be properly prepared, each business should first take stock of the type and amount of its annual greenhouse gas emissions, as well as how it uses energy. This means accounting for emissions from stationary combustion equipment (boilers) and power consumption, and examining whether operations or machinery could be more energy efficient. Being aware of emissions levels and energy use will allow food processors to gauge the level of impact the APA will have on the profitability of their operations.
There are resources available to help determine how the APA will directly impact a company. Staff members in larger operations who are responsible for environmental health and safety should certainly have an understanding of the information included in the APA, and smaller firms may outsource this function to consultants. In any case, it may be helpful to contract with an independent energy management company that can lend strategic guidance.
As businesses prepare to move into a more constrained carbon marketplace, it important that food manufacturers and processors understand their level of vulnerability to the proposed changes and how the new bill may affect their operations and profitability.