AMERICAN CARBON MARKET?

U.S. Companies Explore Ways to Profit From Trading Credits to Emit Carbon
Claudia H. Deutsch, December 28, 2006 (NY Times)
- While the trading of credits to emit carbon is under way in bits and pieces and California has moved to cap its production of greenhouse gases, no one expects nationally imposed limits to go into effect in the United States soon. Most experts see 2010 as the earliest possible date.

- Even so, a rapidly growing number of American companies are preparing for what they think will be a booming market after rules are approved…
- EcoSecurities, which has spent seven years investing in the reduction of greenhouse gases in Europe, is setting up a New York office to expand into the United States…Morgan Stanley plans to spend almost $3 billion to trade carbon credits on greenhouse gases over the next five years…American Electric Power has started including the value of carbon credits when it compares the costs of traditional coal-burning plants with more expensive, cleaner ones.

- Carbon trading is common in Europe and parts of Asia, where many countries operate under the Kyoto Protocol…The United States has refused…Most of the countries operate under a “cap and trade” system in which nations allot companies the right to emit a set amount of greenhouse gases. Companies that emit less than allowed, or that build new clean-burning plants, get credits they can then sell to companies that need them to meet the standard because they are emitting more than their allowable amount.
- For now, trading in the United States is voluntary: 225 companies that have made promises to reduce greenhouse gases by 6 percent by 2010 are trading carbon credits on the Chicago Climate Exchange. Prices for the credits started around 90 cents per ton of carbon when the exchange was established in 2002; they now trade around $4.
- Most experts said trading would pick up in California, which has passed greenhouse gas rules (they are being challenged in court), and in the Northeast, where a coalition of states are following California’s lead. But once national rules pass, as many experts predict, the market is expected to explode…
- GE Energy Financial Services is already negotiating to invest in projects that keep methane from escaping from landfills and coal mines, and it will take ownership of many of the resulting carbon credits…Insurance companies and consulting firms see the potential for profit, too. Marsh, [a unit of Marsh & McLennan], which is in both those businesses, is helping clients assess the risks and potential rewards of carbon abatement projects…

- For many companies, though, the motivation has less to do with the potential for profit. American Electric Power, one of the climate exchange’s 14 founders, joined partly to influence national policy…Once emissions rules are in place…it may make more economic sense to earn carbon credits by planting a forest or capturing methane from agricultural holding ponds than to cut emissions by switching a carbon-spewing coal plant to natural gas. Conversely, carbon credits can add to the economic viability of converting coal to gas, efficient turbine components and other clean technologies with high upfront costs.
- The Chicago exchange is being watched for early signs of glitches in its trading systems so those glitches can be ironed out…In particular, companies are already worrying about how Congress will establish baselines, the emission levels from which mandated reductions will be calculated. In Europe, prices for credits plunged this year because too many credits were issued, producing a glut…