Regulators and exchanges prepare for boom in carbon trading

As the Obama administration moves closer to introducing a cap-and-trade system for controlling greenhouse gases, US regulators and other players are preparing for steep growth in the emissions market.

The US Commodity Futures Trading Commission (CFTC), which will lead regulation of the US carbon market, has set up a new panel, the Energy and Environmental Markets Advisory Committee, to help develop the rules for carbon trading. The 28 members include academic economists, energy industry representatives and regulators. Among them are Richard Sandor, chairman of the Chicago Climate Exchange (CCX), Robert Pickel, the chief executive of the International Swaps and Derivatives Association, former CFTC chairman James Newsome, and former Federal Energy Regulatory Commission chairman Elizabeth Moler.

CFTC commissioner Bart Chilton, who will chair the panel, said: "I know it is sort of rare for government to do a lot of work before a new law is even passed, but carbon markets are too important for us not to get right."

In a report published yesterday, Boston-based financial consultancy Celent acknowledged that carbon trading was almost exclusively concentrated in Europe, with the majority - an estimated 80% - of total volume going through the European Climate Exchange in London. But, Celent predicted, CCX, its US sister exchange, "stands the best chance to grab the initial emission market when the US lays down national emission control policies" and "will see tremendous rise in volume once a national emission policy is put in place".

Meanwhile, in Europe, London-based data provider Markit and BlueNext, the second-largest emissions exchange with 16% of the total market, have agreed to produce indexes and related products for the carbon markets, starting with an end-user allowance spot index and a certified emission reduction spot index. The spot markets are set to grow significantly this year as supply increases, Celent said, pointing out that BlueNext, unlike other carbon exchanges, is almost entirely a spot market, with only 0.3% of total volume made up of derivatives trades. The consultancy also pointed to geographical expansion as the main source of growth in the market, with Japan and Australia set to join the US as emissions-trading markets. The emissions market grew an estimated 78% in 2008 to $116 billion.

See also: CFTC names Chilton head of energy committee
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Indexes emerge