John McCain in mid-May joined both Democratic candidates for the U.S. presidency in calling for a cap-and-trade system designed to reduce greenhouse-gas emissions. McCain’s announcement set global carbon markets atwitter. Now, regardless of who wins the White House in November, a carbon-trading system looks more likely to follow.
Cap-and-trade involves capping emissions and distributing carbon credits to participants. If they pollute above their quota, they must decide whether it’s cheaper to buy credits or invest in cutting emissions. Result? Considerable energy price hikes — and booming carbon trade.
Carbon trading is already big business. According to a World Bank report released in May, the global carbon market doubled in value last year, to US$64 billion from US$31 billion in 2006. A U.S. carbon market could reach US$1 trillion by 2020, predicts another report from New Carbon Finance, a New York–based research firm. (It estimates carbon at US$40 a tonne, representing price hikes of 20% for electricity, 12% for gasoline and 10% for natural gas.)
Political uncertainty over global warming has left North Americans unprepared either to mitigate the costs of the carbon market — or to take advantage of the opportunity it presents. Economist Mark Jaccard says an integrated North American market would reduce the economic impact of carbon pricing — yet to date, neither the U.S. nor Canada has an exchange that trades regulated products. On May 30, however, the Montreal Exchange plans to trade carbon futures, reflecting initiatives in February’s federal budget to establish a carbon market in Canada.
Whether this effort will have the desired effect is unclear. No government in Canada is able to agree on how to price carbon, undermining efforts to commoditize it. Moreover, the regulations to obtain credits don’t necessarily encourage trading. If Canada is serious about a carbon market, federal and provincial policy-makers must work harder to come up with a coherent plan, and the Tories must rethink the regulations so the onus is on trading to obtain credits — rather than opting out.