Carbon trading: Greenhouse gases offer growth prospects

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Traditionally, the words “carbon trading” have been accompanied by the word “potential” – as in the prediction by its proponents that carbon dioxide emissions have the potential to become the world’s biggest commodity within the next few decades.

Emissions trading has grown rapidly since the introduction of the Kyoto Protocol, with healthy markets in United Nations and European Union credits.

However, the lack of a national mandatory carbon regime in the US has meant that what should be the world’s biggest carbon market has developed as a relatively small-scale patchwork of voluntary and regional trading schemes.

Now, however, with the US poised to come on board, carbon trading may finally fulfil its potential.

The House of Representatives passed cap-and-trade legislation in June.

The Senate is debating its own version of the bill, and the Obama administration is keen to see signi­ficant progress before December’s UN climate conference takes place in Copenhagen.

While that may prove too ambitious a deadline, many US companies are already operating under the supposition that carbon trading under a federally mandated programme is inevitable.

At a time when derivatives trading has fallen in the wake of the financial crisis, volumes for trading greenhouse-gas emissions futures have exploded on the Chicago Climate Futures Exchange (CCFE), the US’s biggest platform.

CCFE had a record month in September, with 203,794 contracts traded – 16 per above the previous record set in June this year.

However, at the same time, trading volumes have fallen markedly for the voluntary carbon-emission permits traded at the Chicago Climate Exchange (CCX), which along with CCFE and the European Climate Exchange is part of the Climate Exchange group. Volumes are down more than 40 per cent since last year.

In part, that reflects concerns about how the carbon financial instruments traded on CCX will be accommodated within any federal regime, says Jim Kharouf, editor of the Environmental Markets Newsletter, part of John Lothian & Co, an online financial media firm in Chicago.

Mr Kharouf says: “The futures market is arguably the safer market to be in, because you can just close out the position – you’re not actually holding the physical contract.”

Richard Sandor, who founded CCX and serves as its chairman and chief executive, concedes that “legislative uncertainty is clearly a factor in our markets”.

However, the House bill embraces CCX credits and Mr Sandor – who counts President Barack Obama and Rahm Emanuel, his chief of staff, among his backers – says he is “continuing to work with Congress and policymakers in Washington”.

Ultimately, Congress may not pass any legislation at all. A climate change bill failed to make it through the Senate last year.

The House version passed by just 219 votes to 212. There could be further resistance when it comes to reconciling the two versions, fuelled by fears that cap-and-trade could kill jobs in the industrial heartland and raise electricity prices.

Experts say the market will continue to develop even if the US fails to pass federal legislation.

There is already one mandatory regional cap-and-trade programme – the Regional Greenhouse Gas Initiative, which includes 10 US states and applies to power producers.

Other regional efforts – such as the Western Climate Initiative (made up of seven US states and four Canadian provinces) and the Midwestern Greenhouse Gas Reduction Accord (six US states and one Canadian province) – may become mandatory if efforts in Washington stumble. The US Environmental Protection Agency could also create a carbon market.

That seemingly inexorable growth is prompting competition. CCX and CCFE are braced for a renewed challenge from the Green Exchange, a venture backed by the CME Group, the world’s biggest commodities exchange, and some of the biggest emissions traders, including Goldman Sachs, JP Morgan, Credit Suisse, ICAP and Evolution Markets.

Tom Lewis, chief executive of Green Exchange, thinks that, with federal legislation, the US carbon market could soon be worth $600bn, dwarf­ing the European market.

Green Exchange’s challenge should not be underestimated, says Mr Kharouf. “Once we have a national market they’ll be in a good spot.

“They have all the big players, who would love to have a second carbon market here. So we could see two or more liquid carbon markets in the US.”

Mr Sandor says he welcomes competition. “We see it as raising awareness and helping develop carbon markets,” he says, but adds: “We’ve had a great start and are confident in our ability to prevail in these markets.”

Posted on October 23, 2009 · in USA

Tagged as: CCFE • emission permit • emissions trade