U.S. exchanges explore carbon trading
NEW YORK (Reuters) - Some of the biggest U.S. exchanges are eyeing a piece of the global carbon trading market, which is expected to double in size by 2012 from current levels as governments and industry step up efforts to reduce pollution.
The market for trading carbon emissions reached 22 billion euros ($32 billion) in 2006 and will cross 40 billion euros ($58 billion) by 2012, according to a report by Boston-based research firm Celent.
"The opportunity is that it's a new product area that's not traded very heavily on exchanges right now," said Niamh Alexander, an analyst at Keefe, Bruyette & Woods.
"Lots of exchanges are likely to come up with different structured products to participate in that market," she said.
Analysts said carbon trading is likely to be among the slew of lucrative new products that exchanges are racing to offer customers. Exchanges the world over are buying stakes in each other to take advantage of new technologies that allow customers to swiftly trade a variety of products, from currency options to weather futures, across national boundaries.
New York Stock Exchange operator NYSE Euronext recently said it has partnered with French bank Caisse des Depots (CDC) to launch a carbon trading market in early 2008.
The market will allow trading and settlement of carbon dioxide allowances and credits, which can be bought and sold like any commodity.
NYSE Euronext spokesman Stefane Flex said further details will be presented at the United Nations' panel on climate change next month.
Craig Donohue, chief executive of CME Group Inc, the world's largest derivatives market, also said on a third-quarter earnings call his exchange was interested in developing carbon trading products.
CME recently acquired a 10 percent stake in Brazilian derivatives exchange BM&F, and Donohue said carbon trading may be a joint area of focus.
"Our agreement with BM&F does call for joint product development... but very much in particular, we are going to be focused on the agricultural and commodity markets, as well as the carbon market," Donohue said.
Exchanges can help create transparent and rules-based markets for trading carbon and other greenhouse gas emissions, analysts said.
Currently, about two-thirds of carbon trading happens in over-the-counter markets, said Veronique Bugnion, managing director of Point Carbon, which provides research on global energy and carbon markets.
Four exchanges -- Nord Pool, Powernext, the European Carbon Exchange and Chicago Climate Exchange -- conduct the remainder, Bugnion said.
The Chicago Climate Exchange is the first U.S. exchange to create a market for carbon credit trading.
Nymex Holdings Inc, owner of the New York Mercantile Exchange, has also said it will begin offering contracts for carbon trading in the first quarter of 2008.
The United States, -- unlike the European Union -- is yet to establish a mandatory nationwide cap on greenhouse gas emissions. But many U.S. companies, including giants like Ford Motor Company and Intel Corp, are participating in voluntary trading of carbon allowances.
"Exchanges are gradually nibbling away at the over-the-counter market," Bugnion said.
But Celent analyst Axel Pierron, who authored the report, said lack of liquidity and uncertainty around regulation has prevented exchanges from jumping in to offer carbon trading.
"The carbon emission market is benefiting from the emergence of exchanges ... (but) the question is more about the economic viability of these exchanges," Pierron said.
(Editing by Dave Zimmerman)
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