Carbon Trading After Copenhagen: What About U.S. Legislation?

I went to a conference on Carbon After Copenhagen this morning that was very interesting and points to an emerging asset class in the U.S.Several Wall Street participants involved in energy and commodities brokerage, market making and clearing, were there to get the lay of the land. It was a great opportunity to learn about pending regulations for carbon emissions in the U.S.

Despite the stalled progress on developing a global framework for climate change in Copenhagen, several states, like California and regions have been active in setting emission standards. There's something called the Regional Green Gas Initiative (RGGI) in the Northeast, and there is a contract that trades off of that.

From what I could glean, several brokers with backgrounds as OTC market markers are currently serving as intermediaries between the buyers and sellers of carbon credits. Some brokers are involved with financing environmental projects. Cantor Fitzgerald's CO2e was on the panel and we've already reported that Knight Trading is building a carbon business and hiring traders.

There is already trading of carbon credits on the Chicago Climate Exchange and on the Chicago Climate Futures Exchange. However, participants said there is more liquidity in London, where the ICE European Futures Market- partnership with the European Climate Exchange (ECX)- offers the leading European emissions futures market.

Meanwhile, corporations that generate a lot of CO2 are buying the credits to protect themselves against future penalties. Others are buying up the credits on speculation that they will rise in value once there are federal regulations or penalties imposed on corporations. Jonathan Stock, senior broker, U.S. Carbon & Renewable Energy Trading, Cantor CO2e, said he deals with voluntary corporate buyers; those that have a huge carbon footprint can buy carbon offsets.

Because there is no uniform federal regulation requiring companies to reduce their Greenhouse Gas emissions that is making it harder for a single market to evolve.

"We're seeing a shanty town of all these different regulators. This certainly is not good for the carbon markets," said Professor Michael B. Gerrard, Andrew Sabin Professor of Professional Practice, Director, Center for Climate Change Law, Columbia Law School, speaking at the conference in New York City. However, fragmentation of the various regulations and types of offsets and credits could be good for traders by creating arbitrage opportunities. While one speaker argued that the contracts are not fungible, and this was a problem, another said there's a value in the spread between the various contracts.

From everything I heard, carbon trading is an emerging market that could become a big deal and U.S. financial services firms are paying attention. Here's why:

* The Environmental Protection Agency (EPA) has announced new Greenhouse Gas (GHG) reporting rules. The reporting rules require facilities that emit 25,000 metric tons or more of GHGs to submit annual reports to the EPA. The first reports are due to be submitted to the EPA in 2011. * In December 2009, the EPA, under the Clean Air Act, released an Endangerment Finding, concluding that GHGs in the atmosphere endanger the public health. Second, it found that GHG emissions from new motor vehicles contribute to atmospheric concentrations of GHGs and hence to the threat of climate change.

* The state of California may enforce its own vehicle emissions standards (with 12 other states to follow). This would require car companies to manufacture vehicles that get 35.5 miles per gallon of gas by 2020.

However, the chances of the U.S. senate passing a climate change bill this spring, in the wake of the House passing a bill in June, was deemed unlikely by panelists. With the Obama Administration's focus on healthcare legislation, and Democrats worried about the mid-term elections in November- on the heels of the Republicans winning the seat in Massachusetts-they're unlikely to push a climate change bill through the senate, panelists concluded.

Despite the fragmented nature of U.S. regulation, offsets and permits, the climate change issue won't go away. Some corporations stand to gain an edge from being sustainable and will voluntarily reduce their carbon footprints, said speakers. Examples are Nike, DuPont and Walmart have started voluntary programs to reduce their carbon emissions. Walmart has even forced its suppliers to jump on the low-carb(on) bandwagon.

Another reason why this issue won't go away is that some major corporations are voluntarily going ahead with sustainability to reduce energy costs. "That is not from any punishment, they are looking at the gains," said Madeleine Tan, partner at Kaye Scholer LLP, who chaired the event. Bottom line, I'd like to learn more about carbon trading and how financial firms are taking advantage of this market now.I went to a conference on "Carbon After Copenhagen" that was very interesting and points to an emerging asset class in the U.S. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio