While it might seem like a $2 trillion new carbon market will be created overnight with a presidential signature, the current players in this new commodity have been quietly building its infrastructure for several years already.
In addition to the usual specialized brokerage and accounting services any commodity might need, carbon markets also require established standards to ensure all credits are reliably similar, and registries to track all of these credits from birth to retirement.
Work has already begun on those key back office functions, using the nascent American carbon markets, says Katherine Hamilton, managing director of Ecosystem Marketplace, an environmental markets information firm.
“Over the past three years, we have witnessed this market grow rapidly in volume and maturity,” says Hamilton. Her firm co-authored a report on US carbon markets this past summer, pointing out that 2008 saw an entrenchment of existing standards and an advancement in the integration of carbon credit registries.
To understand the process of settling and accounting for carbon markets transactions, you need to start with how an actual carbon credit is created.
Assuming there’s a cap-and-trade market, like those currently proposed in Congress, there would be two types of carbon credits, typically denominated in “tons of carbon dioxide equivalents.” The first are allowances that are distributed among—or auctioned to—the emitting industrial sectors that are regulated, or “under the cap.” These credits can be traded among regulated entities.
The second type of credits are offsets, where non-regulated sectors can create their own emissions-saving initiatives and sell the resulting credits to whatever buyer may want them—whether it’s a firm in a regulated industry, a voluntary-market buyer with a corporate responsibility or marketing reasons to buy carbon credits or a speculator, like a hedge fund or proprietary trading desk.
To ensure they’re compliant and safe from fraud, each of these credits needs to be verified, tagged with a unique CUSIP-like serial number, registered, tracked as it’s traded or held and, finally, retired.
“There’s an entire workflow,” says Reiner Musier, vice president and chief marketing officer of APX Inc., an environmental commodities and energy markets firm that helps clients with this process. “It’s a process that involves lots of documentation...everything needs to be traceable.”
Often a management team’s first step is completing a carbon accounting to estimate their firm’s overall carbon footprint.