Carbon credits and investor due diligence

Within the next three years, the federal government is expected to enact legislation capping carbon output levels for U.S. businesses. U.S. companies will either have to reduce their greenhouse gas emissions by a certain percentage, to be determined later, or buy carbon offset credits from businesses that have reduced their carbon output in excess of their required minimum. Why is this a problem for investors? Once the federal carbon caps are in place, carbon offset credits will be much more expensive to purchase. Companies with excessive carbon outputs will pay a steep price for carbon credits.

Why don't companies take a more proactive approach and purchase carbon offset credits now when the price is much lower? Unfortunately, the carbon credit market is presently completely unregulated. There is no standardized system for measuring carbon reduction amounts nor is there any way to verify the legitimacy of such carbon credits as do exist. Companies that wish to market themselves as "green" may voluntarily participate in various carbon reduction efforts, such as reforestation projects. But there is no guarantee that the federal carbon cap program will recognize those efforts once mandatory caps are in place.

Many of the same problems exist with Renewable Energy Certificates (REC). There is no national registry of who owns what RECs, no verification as to whether the energy is actually generated from clean energy sources. There is no standardized method to convert RECs into carbon offset credits. In the next 3-4 years, all investors in all types of companies will be forced to consider carbon output numbers as one more factor in the due diligence process.