From the May 2008 issue of Investment Advisor • Subscribe!

May 1, 2008

Carbon Commerce

Carbon emissions trading, whereby companies and individuals can buy and sell carbon credits with broker/dealers facilitating the transaction, is growing, according to a recent TowerGroup report, Carbon Credit Market: Rising as Fast as the Sea Level. "The carbon trading movement is compelling because it satisfies the desire to reduce greenhouse gases while also affording revenue-generating opportunities," said Stephen Bruel, an analyst with TowerGroup, in a statement.

The European Union Emissions Trading Scheme (EU ETS) is the European Commission's plan to comply with the national reduction targets that the Kyoto Protocol dictates, and is an example of a cap-and-trade market, in which businesses are given an allowance of emissions. The EU ETS currently covers about 46% of all CO2 emissions in the European Union. If a corporate emitter exceeds the allowance, it needs to purchase offsets; if it emits less than its allocation, it can sell the excess credits on the market to parties that need to cover their shortfall.

The carbon market is in its early stage; thus, between 70% and 80% of all carbon emissions transactions are conducted over the counter, according to TowerGroup. However, as products become standardized and exchanges expand their offerings, TowerGroup expects trading to become more exchange-based. Furthermore, TowerGroup predicts that allocation of carbon trading activity to the EU ETS will drop from 81% in 2006 to 69% in 2012 because of the increased number of carbon schemes worldwide.

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