Carbon Markets:

Merrill Lynch's Karmali discusses role of markets in economic recovery

What role will carbon markets play as the United States recovers from the global economic downturn? How can the United States successfully integrate a cap-and-trade system without burdening taxpayers? During today's OnPoint, Abyd Karmali, managing director of carbon markets at Merrill Lynch and president of the Carbon Markets & Investors Association, discusses the future of carbon markets as the United States seeks to implement a cap-and-trade program. He gives his take on the Waxman-Markey climate and energy draft. Karmali also explains whether a Pan-American carbon market could be beneficial to reducing emissions from manufacturing and trade.

Transcript

Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. Joining me today is Abyd Kamali, managing director and global head of carbon markets at Merrill Lynch and president of the Carbon Markets and Investors Association. Abyd, it's great to have you on the show.

Abyd Kamali: My pleasure, thank you.

Monica Trauzzi: CMIA is an international trade association representing service providers to the global carbon market. With the huge focus that we're seeing on financial markets these days because of the economic downturn, what role do you see carbon markets playing in the short-term and long-term in order to get us out of this economic catastrophe that we're in?

Abyd Kamali: Sure. Well, I think what's emerging is a consensus that we've got twin challenges. One of, as you say, global economic crisis and the second of a global climate change crisis. The two are quite interwoven with and carbon markets are actually one of the solutions that can help deliver progress against both those two challenges. And the way that will occur is by imposing a price of carbon through a market which is free-flowing you actually allow capital to then flow to the lowest carbon solutions, the most cost effective solutions and that will enable us to deliver the climate mitigation goals at lowest cost to the economy. And at the same time create new jobs, green jobs, green-collar jobs as some people are calling them.

Monica Trauzzi: Congressman Sensenbrenner is the ranking member on the House Global Warming Committee here in the U.S. and he says that cap and trade will have devastating impacts on Americans. He's concerned that taxpayers are going to end up being burdened and essentially pay more taxes as result of a cap and trade. Is there reason for pause because of the economic downturn before we go ahead and push a cap and trade through to think about things from that standpoint, from the taxpayer's standpoint?

Abyd Kamali: Well, I think one should always, when coming up with legislation that's going to be so cross cutting across each sector of the economy, look at how to implement the environmental goal in the most cost efficient way, because this is going to have a significant economic impact, although I would dispute that it's going to be uniformly negative. In fact, if you look at the evidence from the existing carbon markets, namely the European Union Emission Trading Program, as well as the clean development mechanisms which are going on in developing countries, I would argue that the negative economic impact has been very minimal. In fact, there's been new opportunities created by having a price at CO2 that mobilizes new kinds of technologies, provides a spur if you like to, for example, renewable energy, energy efficiency measures. And, in fact, some of the hysteria, if I can put it that way, about the projected economic impacts, I think are significantly overblown. And also we have to look at the alternative, which is the more we delay the more the economic pain is going to be because you can address this issue at roughly 1 percent of GDP per year or you can choose to ignore it and then build up the significant pain and then have to deal with it at several orders of magnitude higher than that. And that will have a devastating impact on the economy.

Monica Trauzzi: What are your thoughts on the recent draft legislation coming out of the House from Congressmen Waxman and Markey? Is that the right approach for the U.S. to be addressing cap and trade?

Abyd Kamali: What really pleases me about this piece of legislation is ... well, there are several factors. Number one, it's timely. The debate is going to begin in earnest once Congress comes back over the next week or so. And number two, it builds on the lessons learned from some of the other experiences, for example, in Europe and even of course historically in the U.S. with other environmental programs like SO2 and NOX. And the third positive is that it really provides a very ambitious program, not just for the short term, but emission reduction targets all the way out to 2050. So I think there's many benefits to it. Some of the details are yet to be ironed out, for example, how allowances get distributed to companies and that's going to be a hot issue unquestionably, but there's many, many positives in that bill which I think bode well for the debate.

Monica Trauzzi: Congressmen Doggett and Cooper recently circulated a bill that would implement a board that would determine and adjust the price of carbon for the first eight years that a cap and trade is in place. Is that a necessary addition to a cap and trade or will that artificially affect the market in a negative way?

Abyd Kamali: I think those of us who are practitioners in the market, and I speak here for the representatives of my members at the Carbon Markets and Investors Association, are quite nervous about the idea of significant government intervention into the carbon market, such as has been proposed by the congressmen you mentioned. And the experience is that supply and demand in the carbon market, when allowed to be free-flowing, can result in a market which is not volatile at all when compared to, for example, other energy commodities. The practical reason for that is, well, you don't need carbon on the flick of a switch like you do, for example, electricity or in some cases the fuel markets. So there's less volatility. Of course, there's some concern that the price of CO2 may escalate to levels which weren't previously forecast. But at the same time, prices can go the other way. And we've seen that in Europe. It can go out. It can go down. I think once policymakers realize that this is a long-term effort, we're talking about a market that goes all the way out to 2050, that there are some other cost containment provisions that will naturally keep prices at a more stable level, on average I'm talking about. Such as the use of carbon credits, both domestic carbon credits and international carbon credits. I think we'll see some of the discussion about these price intervention measures dissipating.

Monica Trauzzi: There's been a lot of discussion recently about creating a Pan American carbon market that would include the U.S., Mexico, Canada. Considering all the crossover that we see between these three countries in terms of trade and manufacturing, how necessary is it to take a serious look at this idea and is it getting enough play at this point?

Abyd Kamali: I think it's an idea which has actually been there for awhile, you know, the idea of having hemispheric trading of course through NAFTA already exists and the idea is to build on carbon on top of that. But I would argue we are at a situation now in 2009 where we have already a $118 billion carbon market, projected to grow to roughly a trillion dollars by 2020. That market is going to grow with fungiblity, with linkage of the U.S. market to not just Canada and Mexico, but all of the other markets which exist today, both cap-and-trade schemes as well as project offset schemes. So I would argue, yes, of course, let's focus on getting the U.S. cap-and-trade scheme started, but then let's not be shy about linking into other markets that already says, perhaps initially one-way linking to make sure there's some learning by doing first and that the U.S. isn't exposed immediately to some externally set price of CO2. But then gradually link in those markets on a two-way basis so that we get the full market efficiency, so that the average abatement cost that's faced by the compliance entities, and that's after all what we're trying to minimize. That's the whole rationale for having these markets, you know, that can be put in place. And then the third benefit would be of course that you allow the flow of cleaner technology, both within the U.S. and then across the developing countries.

Monica Trauzzi: Final question here. There's a lot of concern about the effectiveness of offsets, the environmental effectiveness of offsets. What role should offsets play as the U.S. looks at creating a cap and trade? How should we be weighing those and including them in a program?

Abyd Kamali: You know, the evidence here is that carbon offsets will play a crucial role in two ways. Number one, they will provide some of that cost containment that people on Capitol Hill are obviously looking for by providing, in many cases, a lower form of greenhouse gas emission reduction, then, for example, some of the domestic abatement measures. And the second role they play is that they help to engage developing countries. And as you know, we can't solve the climate change problem if we only focus on the U.S. and other OECD markets. We need to get China under an emission reducing trajectory. So that's the second function that offsets play. Yes, there's been some questions about the environmental integrity, but I would argue that that's partly because we're in a learning by doing process. You know, this is a pilot mechanism. It's only been around for several years. Yes, there are going to be some kinks in the system. Everyone knows we need reform in the carbon offset system, but that's going to happen. Some of that was already put in place in Poznan; more can be expected in Copenhagen. And then I think we'll see a fully fledged offset system allowing entities in the U.S. to benefit from low-cost emission reduction opportunities.

Monica Trauzzi: OK, we'll end it right there on that note. Thank you for coming on the show.

Abyd Kamali: Thank you, my pleasure.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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