| Kippreport.com

Special report: Carbon capping

May 7, 2010 9:54 by Emily Meredith

Predicting how a voluntary market would function is particularly difficult, however, because some trading houses use the exchanges as a training ground in the event that mandatory caps are introduced.

“Obviously it becomes much easier to set something up [with government mandates] because it’s supported by regulation and because companies would then have to comply,” says Otto Wold.

Given the challenges with liquidity and regulation, it will still take years to implement a local carbon exchange. The chief executive of the European Climate Exchange, Patrick Birley, emphasized the need for government regulation on carbon exchanges in order to create real business opportunities. “It’s probably misnamed as cap-and-trade,” he says. “By putting these caps on major industries, what one creates is essentially an artificial shortage. Without caps on emissions there’s no reason to have trading.”

“I think one of our key success factors, a key reason why we have been really successful, is that our market has been well regulated, completely transparent, and open to scrutiny,” Birley says. He notes that a more opaque market could invite more criticism.

Many make the argument that, if the spending for projects provided enough monetary incentive to companies, they would do it anyway and there shouldn’t need to be regulation mandating carbon reduction. But companies require payoff in the medium term and can’t always consider a program that will only see cost benefits in twenty years.

A Middle East exchange would have other challenges, even if liquidity were easily achievable. The ultimate aim of an emissions trading cap is to reduce itself, and eliminating emissions means that the people trading emissions will not be able to make money from them. But Otto Wold says this is not a short-term enough concern to negate the reductions. “Setting those rules in cooperation with those who might participate creates a little bit more ownership,” he says. “[But] at the same time you need to set those rules so you have some environmental integrity, and the next step would be how do you create trading on a platform.”

If a Middle East carbon exchange were voluntary, Otto Wold says, it would look more like the climate exchange in Chicago than the one in Europe. “You have municipalities participating or companies participating for public relations reasons and then you have trading firms,” he says. “So some kind of base or community that is looking to participate or willing to participate is important.”

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Tags: carbon capping, Mazdar