Trading May Yet Bloom

By CAROLYN CUI

For the handful of investments banks that resiliently kept their carbon-trading desks during the financial crisis, a potential payday may come a step closer this week.
Morgan Stanley and Barclays PLC were among banks that continued to trade in U.S. regional markets as well as Europe anticipating that the market would balloon with U.S. legislation capping carbon emissions. Others such as Credit Suisse and Suisse Re closed down their carbon trading desks as the financial crisis took hold.
The market, mainly driven by trading in Europe, reached $118 billion last year, a drop in the ocean when compared to the $15.3 trillion global commodities markets. The addition of the U.S. could help boost the global carbon market to $2.1 trillion by 2020, says New Carbon Finance, a London-based research firm.
"Carbon, while relatively small, is a critical piece of our commodities offering,'' said Nancy King, head of U.S. emissions trading at Morgan Stanley.
In recent years, banks, insurers and commodity brokerages set up carbon-emission trading desks in preparation for the opening up of the U.S. market.
But it wasn't smooth sailing. Carbon prices tumbled nearly two-thirds in Europe after the global financial crisis took hold last fall, before recovering some losses. Carbon markets contracted 16% to $28 billion for the first quarter.
Barclays Capital, which started trading carbon in 2004, has made some forays in the U.S. market by trading in the existing markets, such as the Regional Greenhouse Gas Initiative, a carbon cap and trade program among 10 northeastern and mid-Atlantic states.
While carbon trading is small, "we expect it to become a global commodity market, just like crude oil," said Louis Redshaw, head of carbon trading at Barclays Capital.
Write to Carolyn Cui at carolyn.cui@wsj.com