| Sourced From |
Is carbon trading the next big thing for U.S. business? A panel of international experts on carbon trading gathered in New York City yesterday to discuss and outline what a U.S. carbon trading market might look like. The first half of the debate focused on how legislation, policy and regulation will affect the carbon market. The second half of the debate centered around the role of electronic trading in the carbon market.
The panel debate was sponsored by Trayport, a London based software company specializing in carbon trading platforms. Trayport software is used by 70% of the carbon trading market worldwide.
Several themes emerged during the discussion, the role of carbon offsets and how to seamlessly create them, the expected price of carbon per ton on the open market, the need for transparency in operating markets and trading, regulatory consistency and neutrality on carbon market price and the stages of growth in carbon trading in the U.S. and world.
Carbon offsets come from new players to the Climate Change control debate, tree farmers and foresters and cattle ranchers. Offsets are a cost effective way to reduce carbon in the near term through 2020. Many agreed available funding would not meet required market investment needs to create the offsets worldwide.
Environmentalists are at odds over carbon offsets produced both domestically and internationally. Today Greenpeace releases a report critical of carbon offsets through forest preservation from a 10 year old experiment in Brazil called the Noel Kempff Climate Action Project. Christopher Hunter, Vice President at Climate Change Capital says, “Increase domestic offset and carbon reduction programs. Don’t import them.”
The panel also agreed the price floor in the Waxman-Markey bill would allow the back log of offset projects to receive funding and get started while stabilizing the price of carbon on the open market. The panel agreed the price floor for carbon is between $15 and $20 per ton through 2020, thus greatly blunting the cost impact on the U.S. economy and consumers.
Several lessons from the European Union trading experience were listed. First and foremost is the need for transparency in market function and trading. The European Union gave away all carbon allowances in Phase 1, but several companies did not pass along the savings to customers and thus reaped vast profits, angering the public. As the European Union moves toward Phase 3 it will auction off all allowances, a market mechanism pioneered by the northeast Regional Greenhouse Gas Initiative this year in 2009.
Professor Praveen Kumar of the Bauer College University of Houston says, “The uncertainty is not in model price but in regulation. There will be price bubbles and crashes in the carbon market. If bureaucrats “print” more free allowances it could destroy the long term carbon market.”
The panel generally agreed there will be no accord passed this year in the U.S. or Copenhagen. The earliest more international carbon markets could open is 2013. Between now and 2020 the panel sees industries, governments and traders going through a learning phase and gaining lessons from mistakes.
The outlook for carbon trading in the U.S. looks bright as long as the market and regulators can manage the growing pains.
There was less consensus in the second half of the debate with many questions left unanswered because of the mid-stream status of Climate Change control legislation on the Hill. Political allocation in the final joint bill will determine who needs to bank (coal) who needs to trade (foresters and cattle ranchers) and who can play the market based on experience with sulfur and nitrogen trading (power plants).
Volatility in the carbon market is expected and welcome. The Waxman-Markey bill will create a robust carbon trading environment to adjust over and under allocation to market price. Boxer-Kerry seeks to auction all allowances, a vastly different and more revenue rich plan for both government coffers, offset and Green Technology Investment.
The carbon market needs a balance of OTC trading and Cleared Exchange trading. This is a time period of great learning as customers learn from sulfur and nitrogen markets and the European Union experience. Mistakes will be rife in the first decade of market implementation. Complex cross commodity and spreading trading will occur. The Commercial Banking model will take hold, big clients get a banker, small clients get a web portal.
Much remains uncertain until the Capitol Hill fate is determined. The panel did not address EPA’s role in a Best Available Control Technology carbon reduction approach or border adjustment fees or tariffs, in the House bill, veto promised by Obama. The Senate will decide the compromise and whether we get an industry bill or an environmental bill that create real carbon reductions.
