Building a Framework for Carbon Trading

by Sibos Issues, 05 November 2009

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topics:
Risk Management

tags:
APX carbon emissions carbon trading Clean Development Mechanism Jorund Buen Ken Lopian Point Carbon

The global carbon market is predicted to grow to €2 trillion by 2020. Yet although carbon emissions are a global issue, the trading frameworks being developed for carbon are national or regional in focus, responding to domestic or regional regulatory environments.

Some aspects of the trading framework have nevertheless been agreed internationally. The Clean Development Mechanism (CDM), for example, allows industrialised countries to invest in projects that reduce emissions in developing countries as an alternative to domestic emission reduction measures.

“If you look at the way the CDM has evolved in Europe and how the US market will be shaped, I think they’ll be independent though there is a strong underlying desire to link them,” says Ken Lopian, managing director, APX, an infrastructure provider to environmental and energy markets in renewable energy and greenhouse gases, including carbon commodities.

Beyond the regulatory impetus, the operational shape of the carbon trading market will be the result of conscious decision-making by participants rather than an evolutionary process. “I think this the only commodity that is politically created,” says Jørund Buen, senior adviser, Point Carbon, a provider of independent news, analysis and consulting services for European and global power, gas and carbon markets.

“Politicians were responding to scientists saying this was a problem. It was not something that developed bottom up.”

Useful templates?

Are there market models that carbon trading has chosen to emulate? “Yes and no,” says Buen. “The European emissions trading scheme, which has played a very important demand side role so far, is undoubtedly inspired by the existing US trading schemes for sulphur dioxide and nitrogen oxide. Also, carbon is generally traded by the ton of CO2 equivalent emissions. But you have several different jurisdictions trading their own units with specific regulatory features.”

Title passes across country registries. An international transaction log is established under the Kyoto Protocol, but this does not cover transactions in countries like the US that are not Kyoto signatories, nor does it cover most transactions for voluntary compliance. “To say that this is a global standardised commoditised market would be completely wrong,” he insists.

Buen nevertheless supports further convergence. “The problem is global and the solutions will be global,” he says.” It makes no difference whether you are emitting from Bangladesh, Beirut or Berlin.”

“As infrastructure is developed, I do think people will borrow ideas from the securities world,” says Lopian. Securities, for example, have identifiers such as CUSIP and ISIN numbers, providing machine-readable information on the nature of the instrument and the issuer. “In the carbon space at the moment, that doesn’t exist,” says Lopian.

His company, APX, has created a process to standardise and identify environmental projects globally, regardless of registry. “APX will assign a Universal Project Number (UPN) to the corresponding project which will be linked to the environmental instruments produced by the project,” he explains.

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