Carbon Trading May Dwarf That of Crude Oil

At this point, all eyes are on Washington, where a possible federal carbon cap-and-trade system may come out of the American Clean Energy and Security Act of 2009, sponsored by Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.), which passed the House of Representatives this spring. Sens. Barbara Boxer (D-Calif.) and John Kerry (D-Mass.) are expected to introduce their version of the bill Wednesday..

If Washington creates a national market, it will most likely absorb these existing ones.

“As the compliance markets expand, there will be a reduced role for voluntary markets,” says Jared Snyder, assistant commissioner for air resources, climate change and energy for the New York State Department of Environmental Conservation (NYDEC), and whose state is a RGGI member. “There may be niches for them,” he adds, but to achieve the planned reductions “we’ll need to be (regulated) in every sector.”

But that doesn’t mean the work to date has been in vain. Today’s voluntary and compliance markets helped build key infrastructure for future growth, including the development of carbon credit tracking registries, as well as trading and auction platforms.

And since these markets require third-party verification of carbon credit creation and consumption to work effectively, criteria for this evaluation has been fine-tuned. Now, more than 96% of carbon credits are verified by an independent third party to provide transparency and trust.

Some experts believe this means there could still be room for both national voluntary and compliance markets operating in tandem, with the voluntary markets handing industrial sectors uncovered by a federal cap-and-trade scheme.

“With cap-and-trade expanding globally, the voluntary markets are starting to play a crucial role in capacity building as companies start to prepare for emission caps,” said Milo Sjardin, head of North America for New Carbon Finance and co-author of its report. “Demand ensures that the voluntary markets also have a unique role to play alongside compliance markets.”

“We’re hoping for a strong federal program that builds on the work in the RGGI states,” says NYDEC Commissioner Pete Grannis, also chairman of RGGI’s board of directors. “We’ve put a value on carbon and proved the value of auction allowances. The states would still be strong partners.”

Even if the US fails to adopt the legislation this year, other political forces will drive the debate and help shape policy.

The world's two carbon emitters—the US and China—meet for bilateral talks in November and United Nations international climate change talks (billed as the successor to those in Kyoto, Japan in 1997) take place in Copenhagen in December.

“I don’t think we’re going to see a large multinational agreement,” says Lenny Hochschild, managing director at emission brokerage Evolution Markets. “I’m more interested in seeing what happens between China and the US.”

NYDEC’s Grannis has greater expectations for Copenhagen.

“With [President] Obama, we’ll go as an actor and not as people sitting on the sidelines like for the last decade,” he said.

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