2. FINANCE: 'Carbon capitalists' fear Congress will distort markets (ClimateWire, 05/30/2008)

Nathanial Gronewold, ClimateWire reporter

NEW YORK -- Carbon market insiders are upset over certain provisions of the climate change bill that Congress is set to begin debate on next week. Traders and others feel these provisions will unduly limit the scope and scale of a domestic cap-and-trade program and hinder market forces from making it as effective as possible.

They are more than happy that the United States is on course to follow in the footprints of the United Nations and European Union in developing a greenhouse gas pollution allowance and credit trading scheme. Still, carbon traders, offset project developers and financiers here worry that lingering suspicion of markets -- which many blame for the Enron scandal and the past fiasco over energy deregulation in California -- among lawmakers and the general public will prove to be a significant obstacle toward developing the type of carbon market they would like to see.

2007 was another strong year for international carbon credit trading and for the domestic voluntary market. And while this year holds additional promise, "2008, I think, also represents profound uncertainty about what's going to happen in the market," said Eron Bloomgarden, U.S. director for EcoSecurities, an offset project developer and credit aggregator.

At the start of the Carbon Finance and Investment Summit here on Thursday, Bloomgarden and other executives discussed their anxiety over the coming Senate debate over climate legislation sponsored by Sens. Barbara Boxer (D-Calif.), Joseph Lieberman (I-Conn.) and John Warner (R-Va.). Chief among their concerns is a feeling that the bill as it is currently drafted is designed primarily to limit the size of a future carbon credit trading scheme. Some of the key parts they dislike include language that they say keeps a U.S. domestic market detached from international markets -- especially wording in the bill strictly limiting the amount of international offsets that can be allowed in.

Limits on international trades and offsets are concerns

"That would be a pretty limited trading regime for the U.S.," said Joel Bluestein, senior vice president at ICF International, an environmental technology and services provider. Tight limits on international and forestry offsets in the Senate legislation "seems to constrain the liquidity of trading under this bill," he complained.

Bluestein quipped that whoever led the drafting of the bill is obviously "not an expert in trading."

"This has huge implications for the market," he said.

Other executives speaking at the conference agreed. The U.S. carbon market has for the most part evolved from the ground up, with new firms emerging to take advantage of the Kyoto Protocol and the European Union's Emission Trading Scheme and later forming what has become the backbone of the domestic voluntary carbon offset market after the Bush administration withdrew from Kyoto.

This new breed of entrepreneurs, dubbed by much of the media as "carbon capitalists," believes that their experience in involving the United States in international trading and in developing a domestic voluntary market leaves them best suited to understand how Congress should design a nationwide compliance regime.

The ideal system they would like to see is one that allows as much interplay with overseas markets as possible. It should be open to a broad range of offset projects, including those developed under voluntary trading, and it should let the marketplace, and not policy, determine the price for a ton of CO2 pollution.

A phobia about 'safety valve' provisions

Price caps or other "safety valve" provisions are especially discouraging, they say. "You want as many players in these markets as possible," said Lawrence Gage, a broker for CantorCO2e, the emissions trading arm of Cantor Fitzgerald. Capping a price on a ton of carbon is unnecessary because an efficient market could correct itself faster than lawmakers could adjust their rules. Even if the market were to suddenly spike, "it would adjust itself pretty quickly," he said.

Firms active in the voluntary market also complain that legislation under consideration in Washington leaves no space for incorporating the offset credits that they have created or those now being traded in the Chicago Climate Exchange into a federal program. Governments, especially California, seem intent on strictly regulating the voluntary market without bringing any added value to the system they have established, many complain.

Still, the parts of the Senate bill that frustrate these pioneers the most will also likely encourage them to become more active in the coming debate and drafting of climate change legislation. "This is a regulatory-driven process," said Bluestein. "Whatever we do, we have to start with understanding those regulatory drivers."

While lamenting what they don't like about the cap-and-trade bill, conference participants are careful to note that the end game is still a long way off. No one expects any climate change legislation to pass this year, and much of the drafting work will have to be taken up again when a new president enters office in January 2009, they said.

That still leaves time for them to get their voices heard in the flurry of lobbying activity now under way. But market insiders would be wise to get on with their efforts and not leave Congress to its own devices, panelists warned.

"Who knows what they are going to come up with?" said Gage.

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