A Hot Commodity

By Danielle Wagner

One bellwether for the sustainability mindset is the rise in stock over the past few years for carbon trading. With new legislation that has passed the House and is currently pending in the Senate, the carbon trading market will soon be up for grabs.

The American Clean Energy and Security Act of 2009, introduced by Representatives Henry Waxman (D-CA) and Edward Markey (D-MA), would limit the amount of carbon emissions that companies can produce annually, but allow for over-emitting companies to buy allowances from other institutions that have banked their carbon credits. The bill, if passed, would certainly cause a bullish carbon trading market.

Currently, Europe is far ahead of the curve with regard to carbon credit trading. While the U.S. market has been successful, trading $3.3 billion in contracts in the first quarter of  2009, it has much room to develop; the European Emissions Trading Scheme (EU ETS) reached $23.7 billion in the same period. The total carbon credits traded on the EU ETS last year represented eighty-four percent of the world’s carbon market in terms of value while the U.S. market value was around one percent.

Recently, there has been controversy between the two prevailing exchanges for carbon trading in the U.S. over who will dominate the carbon credit market. If legislation does pass the Senate for a mandated cap and trade market, a battle may ensue between the Chicago Climate Exchange (CCX), which already handles most of the carbon credit trading under the Regional Greenhouse Gas Initiative, and CME Group (CME), the Chicago parent of the Chicago Mercantile Exchange, the Chicago Board of Trade and other exchanges.

What began in 2000 as a series of grants from the Joyce Foundation determining the idea’s feasibility became fully operational in 2003. Thirteen charter members included the City of Chicago, Ford Motor Co., Motorola Inc. and Waste Management and CCX now claims over 300 members from around the globe. In 2005, CCX launched the European Climate Exchange and the Chicago Climate Futures Exchange and since 2006, the Climate Exchange Plc, a publicly-traded company, has owned all three exchanges. Due to CCX’s large presence both in the U.S. and in the European markets, analysts find it hard to believe that any other exchange can edge them out.

However, CME has already begun preparing itself for the increase in trading. Along with several powerful partners such as Morgan Stanley, Goldman Sachs and JP Morgan, CME is creating a Green Exchange, presently awaiting approval from the U.S. Commodity Futures Trade Commission, that would trade different environmental products including carbon emission reduction futures contracts and sulfur dioxide futures and options. They have also recently announced plans to trade European Union Allowance and Certified Emission Reduction futures contracts.

President Obama has predicted that, if he signs the bill as it currently stands, over $600 billion worth of carbon credits will be traded within the first seven years after the legislation passes. As it is currently written, the bill would create a mandatory cap and trade system beginning in 2012 but the Senate may put off the start date until 2013. Experts seem to think that long before the system is enforceable by law, companies will begin to participate in order to adjust their procedures and policies to be ready for the new regulations.

However, within the last three years, carbon trading has gone down for the CCX, most likely due to the fact that if the legislation passes as it is currently written, Climate Exchange contracts will not qualify for trading. Richard Sandor, founder, chairman and CEO of CCX, hopes to petition the EPA to admit the contracts to a potential new federal system. “We are talking about what will be the biggest commodity ever traded,” Sandor said.

CCX was the trailblazer in bringing carbon trading to the U.S. and they currently dominate in market share, but the looming Waxman-Markey bill may force some changes. If CME’s Green Exchange is approved, will CCX be able to compete with a behemoth that handled over a quadrillion dollars in contracts last year? Whichever carbon trading market takes the lead, federal regulation would surely make carbon credits the blue chips of this new century.

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