Hello to Carbon Trading (but With Smog?)

By CAROLYN CUI
Carbon trading may get a long-awaited lift Friday, but perhaps with strings attached.
The House is expected to vote on a sweeping climate-change package being championed by President Obama: the American Clean Energy and Security Act.
On Wall Street, passage could breathe life into a market, carbon-emissions trading, that has failed to take off in a big way. The idea of carbon trading is to limit the amount of carbon that companies can emit and allow them to buy and sell carbon credits if they exceed or don't meet the caps. In recent years, banks, insurers and commodity brokerages set up carbon-emission trading desks in anticipation of a robust U.S. market.

But trading didn't gain momentum because the government didn't pass regulation setting national caps. Meanwhile, where there was regulation and markets, in Europe, carbon prices tumbled amid the global financial crisis. Global carbon markets contracted 16% to $28 billion for the first quarter.
U.S. legislation creating a cap-and-trade system would "be a big step" toward greater investment and a full-fledged market, said Anthony D'Agostino, director of the emissions markets at Royal Bank of Canada.
Still, traders aren't universally thrilled with some parts of the bill. One provision would require all carbon derivatives to executed on or through an exchange, an approach that would essentially restrict over-the-counter activity, or deals between private parties.
Banks maintain an exchange approach will increase costs for emitters and reduce product flexibility. Currently, most carbon products are tailored and traded off-exchange.
More broadly, some are worried that the restriction will be applied to other products such as commodities and credit derivatives. "I think it's an overreaction to the AIG mess," said Rep. Michael McMahon (D., N.Y.), a member of the New Democratic Coalition, in an interview. "When a car accident happens, we don't ban automobiles."
The coalition is trying to "knock [the provision] out or change it by amendment," said Rep. McMahon on Thursday afternoon. One possible approach would be an amendment allowing the provision to be superseded by subsequent financial-reform efforts, say people on Capitol Hill.
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