The Emerging International Greenhouse Gas Market

Eileen Claussen, President, Pew Center on Global Climate Change

As businesses, policy-makers, and other stakeholders around the world have become familiar with greenhouse gas emissions trading, it has emerged as the policy of choice to address climate change. Now—with the recent agreements in Bonn and Marrakech, with new carbon trading systems in Europe, and with private sector interest and activity across many economic sectors both here and abroad—we are beginning to see the outlines of a genuine greenhouse gas market.

In this Pew Center report, authors Richard Rosenzweig, Matthew Varilek, Josef Janssen et al. describe the various public and private programs under which many early trades have occurred, the characteristics of the emerging market including the key features of early transactions, and the potential evolution of the market given the concurrent development of domestic and international climate change policy. Case studies of actual trades between four power companies—TransAlta and HEW, and PG&E and Ontario Power Generation—help illustrate leading companies’ motivations for engaging in trading, as well as the challenges they have faced in the absence of clear guidelines in the nascent market.

Despite the impressive interest in greenhouse gas trading, the market that has developed thus far remains fragmented. For example, as originally proposed, the trading regimes put forth by the United Kingdom and the European Union differ in important respects: the former is voluntary and the latter is not; the former covers the full basket of six greenhouse gases while the latter is restricted to carbon dioxide. This results in higher transaction costs just as the market is getting off the ground. The challenge ahead, for business, policy-makers, and others, is to work together to help forge linkages between the emerging regimes, and ultimately to achieve convergence.

I am optimistic that we can meet this challenge. We are beginning to see the first glimmers of interest in the U.S. Congress, although the debate is expected to be long and difficult. Perhaps more encouraging are private sector efforts to build a greenhouse gas trading system, such as the Chicago Climate Exchange. Also, many companies have set up their own internal trading systems to “learn by doing,” and have been eager to participate in early trades. The need for certainty, for consistency, and for a level playing field all will work to encourage a merging of regimes. Policy-makers must do their best to ensure that all systems are compatible.

The authors and the Pew Center would like to thank the companies featured in this report for sharing their experiences and perspectives, and acknowledge the members of the Center’s Business Environmental Leadership Council, as well as Aldyen Donnelly of GEMCo; Erik Haites of Margaree Consultants; Richard Sandor of Environmental Financial Products, L.L.C.; and Tom Wilson of EPRI for their review and advice on a previous draft of this report.