While the trading of credits to emit carbon is under way in bits and pieces and California has moved to cap its production of greenhouse gases, no one expects nationally imposed limits to go into effect in the US soon. Most experts see 2010 as the earliest possible date.
Even so, a rapidly growing number of US companies are preparing for what they think will be a booming market after rules are approved.
"The US market will be the mother lode of carbon trading, so we want to start setting up our brand now," said Marc Stuart, director of new business development at EcoSecurities.
EcoSecurities, which has spent seven years investing in the reduction of greenhouse gases in Europe, is setting up a New York office to expand into the US. Similarly, Morgan Stanley plans to spend almost US$3 billion to trade carbon credits on greenhouse gases over the next five years.
Meanwhile, American Electric Power has started including the value of carbon credits when it compares the costs of traditional coal-burning plants with more expensive, cleaner ones.
Carbon trading is common in Europe and parts of Asia, where many countries operate under the Kyoto Protocol, the international pact regulating greenhouse gas emissions, which is set to expire in 2012. The US has refused to join.
Most of the countries operate under a "cap and trade" system in which nations allot companies the right to emit a set amount of greenhouse gases. Companies that emit less than allowed, or that build new clean-burning plants, get credits they can then sell to companies that need them to meet the standard because they are emitting more than their allowable amount.
For now, trading in the US is voluntary: 225 companies that have made promises to reduce greenhouse gases by 6 percent by 2010 are trading carbon credits on the Chicago Climate Exchange. Prices for the credits started around 90 cents per ton of carbon when the exchange was established in 2002. They now trade at around US$4.
Most experts said trading would pick up in California, which has passed greenhouse gas rules -- now being challenged in court -- and in the Northeast, where a coalition of states are following California's lead. But once national rules pass, as many experts predict, the market is expected to explode.
"This cottage industry has the potential to become one of the largest commodity markets in the world," said Emma Stewart, director of research and development at Business for Social Responsibility, a nonprofit consulting and research organization.
For utilities and manufacturers, the ability to trade carbon credits could take some of the sting out of regulation.
"There is more certainty that we will be living in a carbon-constrained world through some sort of legislative activity, and that helps carbon take on a value," said Sara Kendall, vice president of environment, health and safety for Weyerhaeuser, a forest products company.
That value, in turn, makes it easier to convince shareholders and directors that it makes sense to invest in research on ways to cut emissions even beyond a mandatory level.
"A market-based trading approach fosters innovation," said Edwin Mongan III, director of energy and environment at DuPont, one of the exchange's 14 founders.
"It gives an incentive to use your best technology to get well below the mandatory targets," he said.
But while utilities and manufacturers worry about abating the costs of new rules, financial firms are already figuring out the best ways to profit from them.
Natsource, a green-oriented investment firm, has begun hiring environmental economists and regulatory experts to help "figure out what the regulatory regime will look like, and what sort of abatement projects will make sense from an investment standpoint," chief executive Jack Cogen said.
GE Energy Financial Services is already negotiating to invest in projects that keep methane from escaping from landfills and coal mines, and it will take ownership of many of the resulting carbon credits.
There are only a few deals in the pipeline now, said Kevin Walsh, the unit's managing director, "but we want to get in, learn and have a few deals under our belt when regulation comes to the US."
Insurance companies and consulting firms see the potential for profit, too. Marsh, which is in both those businesses, is helping clients assess the risks and potential rewards of carbon abatement projects. Marsh, a unit of Marsh and McLennan, is also creating new insurance products that mitigate the risk of a project going awry -- say, a forest that burns down, or a carbon leak at a coal-burning plant.
"The US market for carbon credits will be huge," said Gary Guzy, a senior vice president at Marsh, "and we want to be leading the risk management and services side of it."
For many companies, though, the motivation has less to do with the potential for profit.
American Electric Power, one of the climate exchange's 14 founders, joined partly to influence national policy and partly to "get carbon prices embedded in our own people's thought processes," vice president of strategic policy analysis Bruce Braine said.
Once emissions rules are in place, he said, it may make more economic sense to earn carbon credits by planting a forest or capturing methane from agricultural holding ponds than to cut emissions by switching a carbon-spewing coal plant to natural gas. Conversely, carbon credits can add to the economic viability of converting coal to gas, efficient turbine components and other clean technologies with high upfront costs.
The Chicago exchange is being watched for early signs of glitches in its trading systems so those glitches can be ironed out before mandatory emissions rules make trading more a matter of profit and loss than of choice.
"If you shut down an obsolete plant, should you automatically get carbon credits?" asked Matt Cheney, chief executive of MMA Renewable Ventures, which invests in clean energy projects and is a member of the exchange.
"And if I put up a wind-powered plant, should you get the carbon credit for buying my clean electricity, or should I for providing it? It is all still very complicated, because we just don't know what the final US law will say," he said.
In particular, companies are already worrying about how Congress will establish baselines, the emission levels from which mandated reductions will be calculated. In Europe, prices for credits plunged this year because too many credits were issued, producing a glut.
"They should have auctioned off emissions allowances in Europe, not just given them away," said Dan Bakal, director of electric power programs at Ceres, a coalition of environmentalists and investors.
He predicts that an auction system will be built into any US regulatory scheme.
Nor is there any certainty that the Chicago exchange will end up as the primary trading vehicle for carbon credits. Some experts predict that the Intercontinental Exchange, usually called Ice, will take over. Others suspect that the New York Mercantile Exchange, where energy futures now trade, will be dominant.
But for now, Chicago is the only game in town.
"I would say within the next year or so we'll start trading on this market," said Simon Greenshields, managing director of the Morgan Stanley Capital Group. "We want to gain the experience."
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