'Carbon trading' now big business

Typography
While recent months have seen a global contraction in both debt and equity markets, at least one financial market has been booming this year, a market that scarcely existed five years ago.

While recent months have seen a global contraction in both debt and equity markets, at least one financial market has been booming this year, a market that scarcely existed five years ago.

The global market for "carbon trading" grew 36 percent between January and September, to $84 billion from $67 billion, according to New Energy Finance, a London-based company that tracks activity in energy markets. By year's end, the market is expected to surpass $100 billion.

But what is carbon trading?

To begin with, carbon trading does not mean trading carbon. What is being traded are credits for greenhouse gases, with carbon dioxide being first among them.

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Here's how the trading works:

In its most basic form, a carbon market consists of participants who agree to a baseline for carbon emissions. Say that two companies each have a manufacturing plant that emits 10 tons of carbon during the course of a year. As members of the market, they agree to reduce their emissions by 10 percent, to 9 tons of carbon. "Company A" has more cash on hand and begins retooling its plant. In two years, it manages to reduce its emissions, not to 9 tons, but to 8.5 tons. Company A then receives a credit for the amount by which it exceeded the required reduction, or one-half a ton.

Company B, meanwhile, not being as flush with cash as Company A, is moving more slowly than its counterpart. At the end of two years, it has reduced the emissions at its plant to 9.5 tons, a half-ton more than the agreement allows. It is still working toward that 9-ton mark, but in the meantime, it can bring itself into compliance by buying Company A's half-ton credit. Company A has made money, Company B has gained breathing room to continue its retooling, and the overall goal, average emissions of 9 tons per member, has been achieved.

The primary U.S. marketplace for carbon trading is the Chicago Climate Exchange, launched in December 2003 by Richard Sandor, the economist and entrepreneur widely credited with creating financial futures. The instrument of exchange is the CCX Carbon Financial Instrument, or CFI. Each CFI represents 100 metric tons of carbon dioxide, or its equivalent (the market includes five other greenhouse gases: methane, nitrous oxide, sulfur hexafluorides, perfluorocarbons and hydrofluorocarbons).

The exchange has some 350 members, including more than 10 percent of the Fortune 100 and eight cities, Mr. Sandor said. Members make a legally binding agreement to reduce their emissions from year 2000 levels.

"In 2006, they were supposed to have reached a 4-percent reduction, but they have actually reduced them by 11 percent," Mr. Sandor said. The reduction in industrial emissions, 180 million tons, approximates the yearly emissions of France and Belgium combined, he added.

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