‘Subprime’ Carbon?

March 31, 2009


Japan has also tiptoed into carbon trading. The world's 5th-highest greenhouse gas emitter is now test-driving a voluntary carbon market that consists of more than 200 participants, including utilities, steel companies and car manufacturers.

Japan hopes the volunteer cap-and-trade system can help the country meet its Kyoto commitment levels of reducing carbon emissions to 6% below 1990 levels by March 2013. But so far, reaction has been mixed – only 20% of participants have made plans to trade in the new market.

In the U.S., President Obama has included a controversial mandatory carbon cap-and-trade system in his recent budget proposal. The plan would aim to reduce emissions by 14% below 2005 levels by 2020, and 83% below 2005 levels by 2050.

Under the proposal, the government would auction off carbon credits at an estimated $13-20 per ton, which would help generate an estimated $645.7 billion in revenue over the next 10 years. By 2019, the annual revenue from these auctions could top $83 billion, $15 billion of which would be reinvested in new alternative energy projects. The rest would come back to citizens as a tax cut.

The administration's plan, which is currently under floor debate in Congress, has evoked much opposition. Critics cite the volatility of the European carbon market – where carbon contracts trade anywhere from 2 euros/tonne to 30 euros/tonne – which may deter investors at home. Others say the plan would raise energy costs for consumers already struggling in the recession.


The Evolution Of Pollution

Whether or not the president's national cap-and-trade plan is passed, regional initiatives have shown great success. The Regional Greenhouse Gas Initiative, a carbon credit market of 10 Northeastern and Mid-Atlantic states, started trading last year; the market could see as much as 339 million tons of CO2 trading hands in 2009, which could give RGGI 6% of the total global market share. In addition, new regional initiatives in the Midwest and California could launch as soon as 2012.

RGGI carbon futures contracts are available on the Chicago Climate Futures Exchange and NYMEX's Green Exchange. As of March 30, 2009, prices for these contracts range about $3.73-$4.10/ton.

What's more, the universe of carbon exchange-traded products has also been expanding since we last talked about carbon trading. Current offerings include the AirShares EU Carbon Allowances Fund (NYSE Arca: ASO) and the iPath Global Carbon ETN (NYSE Arca: GRN). Launched in February, ASO is an ETF-like instrument that accesses the European futures market for government-issued carbon credits, while GRN is an exchange-traded note that tracks liquid carbon emissions credits worldwide.

Additionally, in March, Standard & Poor's launched the U.S. Carbon Efficient Index, the first in a series of global low-carbon indexes. The new index, which tracks large-caps with low carbon emissions, has fueled speculation that further exchange-traded products could be on the way.

Will carbon cap-and-trade succeed? Only time will tell, of course, but history may be on the market's side: In the mid-1990s, the U.S. instituted a similar cap-and-trade system for sulfur dioxide, a major component in acid rain. In 2007 – three years ahead of schedule – total SO2 emissions had fallen below the instituted cap, and reached the program's goal of 10 million tons below 1980 levels. Much has changed since the sulfur dioxide program was first put in place, but its success suggests that a similar victory might be achieved for carbon dioxide as well.


Further Reading

Subprime Carbon? Friends of the Earth Report
EPA's Clean Air Markets
Point Carbon
Chicago Climate Futures Exchange
NYMEX's the Green Exchange


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