Carbon Trading, Offsets, and Carbon Pooling

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Predictions are that carbon markets will be one of the largest commodity markets in the world—what are the benefits and hurdles?

Written by Bruce Cannon

Carbon markets are becoming one of the largest commodity markets in the world, with an active international marketplace in emissions allowances. In addition, the use of offsets, including carbon pooling arrangements, is an emerging strategy for cost-effective compliance.

"Offsets are the bridge to the next iteration of technology," said Rich Rosenzweig at the Thursday 8:30 am Critical Issue Forum. Customers want cheap offsets, but Rosenzweig, chief operating officer at Natsource, the largest buyer of carbon in the world, acknowledged that the supply of offsets in the early years of any climate legislation is likely to be limited. One of the primary benefits of offsets is cost containment, according to Rosenzweig. "If the price spikes to $50 per ton, Congress will intervene immediately," he said. "You cannot shock the economy." The American Clean Energy and Security Act (as currently written) authorizes 2 million tons of offsets per year, according to Rosenzweig. Still, he cautioned that these systems don't just materialize because they're authorized by law.

The Forum was held the day before the U.S. House of Representatives passed its version of the act.

Having grown from 13 participants to 450, the Chicago Climate Exchange (CCX) is open and ready for business. "Building up institutional infrastructure is critically important," said Michael Walsh, a CCX executive vice president. Since this is a new market, he warned, finding people with sufficient expertise will be challenging for utilities. "The power sector starts off a billion tons short," Walsh said. "And by 2030, no one will be given allowances." If the price of carbon reaches $20 per ton as some modeling suggests, Walsh predicts a steep rise in the price of electricity. "By 2025, the price of electricity will be doubled," he said.

Europe wants to be carbon neutral by 2050, said John Scowcroft, head of environment and sustainable development for Eurelectric, the association representing the European electricity industry. After some initial problems with the over-allocation of allowances, the carbon market in Europe appears to be working, according to Scowcroft. "We started going without accurate data," he said. "You have to be able to base decisions on accurate data." Now that the kinks have been worked out, the market is generating tangible benefits, such as energy efficiency. "Extra efficiency is actually reducing emissions," Scowcroft said.