TESTIMONY OF
JACK COGEN, PRESIDENT, NATSOURCE LLC
BEFORE THE SENATE
ENVIRONMENT & PUBLIC WORKS COMMITTEE
MARCH 14, 2002
Good morning, Mr. Chairman
and Members of the Committee. Thank you
for inviting me to testify. My name is Jack Cogen and I am the president of
Natsource LLC, an energy
environmental commodity broker headquartered in New York City with offices in
Washington, DC, Europe, Japan, Canada, and Australia. My testimony will address
the financial risk associated with climate change policy.
At the outset, I want to
acknowledge that there are legitimate differences of opinion as to what should
be the nature, degree and timing of policy responses to the risk associated
with climate change itself. However,
the role of Natsource is to work with clients who decide it is in their best interest
to evaluate the extent of their financial exposure under possible greenhouse
gas policies. Our clients make the
threshold decision that they are at risk financially. After that, the next step for them is to analyze the extent of
their financial risk and develop strategies that make sense for mitigating that
risk. Natsource contributes its policy
and market expertise to helping clients assess and manage risk.
The client base of
Natsource includes multinational corporations as well as foreign and domestic
firms. Natsource assists them in quantifying their financial exposure under
different policies that might be adopted to limit greenhouse gas
emissions. Our experience indicates
that companies consider a variety of factors when they weigh the degree of risk
they face and what to do about it. The
primary factors are (1) the probability they will be subject to emission
limitation policies, and (2) the potential direct and indirect cost of those
policies to the company.
Natsource provides
analysis, strategic advice, and market intelligence once a company decides to
undertake a comprehensive risk assessment. Generally, we help clients assess
their financial exposure by identifying policies that might be adopted; assigning
probabilities to those policies; quantifying the net emissions “shortfall” or
“surplus” the company faces under each policy; and estimating potential
compliance costs based on the company’s emissions profile, internal reduction
opportunities, and our knowledge of various commodities available in the
greenhouse gas emission markets. Multinational companies face an especially
complicated risk because they operate across multiple jurisdictions with
different policies. In addition, many
of these companies must evaluate the effect of climate change policies on the
market demand for their products in different countries.
If potential compliance
costs are substantial and the probability of emission limitations is
significant enough, the next step for many companies is to develop a
cost-effective risk management strategy.
This involves assembling an optimal mix of measures for reducing or offsetting
emissions. These include internal and
external emission reduction projects, internal emission trading programs, and
external trading markets.
Companies choose to
undertake emission reduction measures in spite of or because of policy
uncertainty for a variety of reasons, including to reduce future compliance
costs, gain experience in the greenhouse gas markets, maintain or enhance their
environmental image, and place a value on internal reduction opportunities.
Greenhouse gas markets are
evolving and will continue to evolve over the next several years. In the future, these markets will function
more smoothly and with lower transaction costs as greenhouse gas policies
become clearer and markets become more liquid.
Even now, more sophisticated financial instruments such as call options
are being used as a hedge against risk.
Natsource recently
completed the first comprehensive analysis of the greenhouse gas trading market
for the World Bank. The analysis identified approximately 60 greenhouse gas
transactions involving some 55 million tons of emissions. These numbers actually underestimate the
total number of transactions because they do not include internal-only
transactions and small volume transactions.
Current market prices for greenhouse gas commodities range from less
than a dollar to over $9 per ton of carbon dioxide equivalent, depending on the
type of commodity and vintage.
In conclusion, Mr.
Chairman, a small but growing number of companies are beginning to more
carefully analyze their financial risk under possible greenhouse gas
policies. For a variety of reasons,
some companies have decided to take steps now to reduce emissions even though
final policy decisions, in most cases, are still pending. As a consequence, these companies are able
to take advantage of the most cost-effective opportunities to reduce their
financial exposure. As the markets for
sulfur dioxide and nitrogen oxides emissions in the U.S. have shown, emission markets
can provide an efficient way to lower the cost of reducing emissions.
That concludes my remarks,
Mr. Chairman. I would be glad to answer
any questions you or other Members of the Committee might have.