Swapping Carbon on the NYSE

Will the U.S. join the carbon cap-and-trade party soon? The NYSE Euronext announced earlier this week that it plans to launch a market for trading CO2 credits early next year. The exchange is partnering with the French bank Caisse des Depots, who will be the exchange's main shareholder. The NYSE Euronext will be the majority owner of the yet-to-be named venture.

The partners offered few details in their brief announcement. "It will offer an organized continuous market to facilitate spot transactions in CO2 allowances and credits, with services ranging from trading to settlement," the statement reads. "There are also plans to develop derivative products, which enhance market liquidity and depth."

Carbon trading creates incentives for reducing pollution by giving economic value to the credits that come from lowering emissions below a certain cap. Cap and trade has gained traction since it launched in 2005, in spite of the fact that it lacks a central trading platform and regulatory structure. There are four main exchanges around the world for swapping carbon credits, and the forthcoming one from NYSE Euronext would provide stiff competition. According to the consulting firm Celent, the carbon trading volume reached 22 billion euros ($31.3 billion) in 2006 and is on track to climb to 40 billion euros ($57 billion) by 2012.

But there is currently no U.S. federal legislation on capping and trading greenhouse gases, as there is in Europe and, more recently, in Australia. But the involvement of the NYSE in this nascent market could push the discussion to the forefront as the presidential race narrows next year.

Earlier this month, Jeff Rubin, chief economist at CIBC World Markets, predicted that the next U.S. administration, be it Democrat or Republican, would pass carbon legislation and that Canada would follow suit. "Government doesn't have to guess how high to set a tax to achieve a given reduction in emissions," he said. "Instead, government starts with its emission reduction target and the market sets the price for emission credits."

by Megan Barnett