Carbon trading set to dominate commodities

The market in greenhouse gas emissions could outstrip the conventional commodities markets to become the biggest traded commodity, the head of the US Commodities Futures Trading Commission said yesterday.

Bart Chilton, commissioner of the CTFC, said: “The potential size and scope of a structured carbon emissions market in the US is unequivocally vast. It is certainly possible that the emissions markets could overtake all other commodity markets.”

Carbon trading was worth about $64bn last year, according to the World Bank, but the US accounted for a small fraction of this. Most of the trading – about $50bn – was carried out under the European Union’s emissions trading scheme, with nearly all of the rest carried out under the Kyoto Protocol, which the US has not ratified.

But Point Carbon, a carbon market analyst company, has estimated that the global carbon market could be worth more than $3,000bn in 2020 if the US were to participate, through setting up its own federal cap-and-trade system to limit carbon emissions and through an international agreement to succeed the Kyoto treaty.

Mr Chilton gave a slightly more cautious view yesterday, saying: “Even with conservative assumptions, this could be a $2,000bn futures market in relatively short order.” Carbon markets also have an effect on other traded commodities such as coal, oil, gas and electricity.

Carbon trading was set up under the Kyoto Protocol as a mechanism to help countries cut their emissions. Under cap-and-trade systems, a ceiling is placed on companies’ emissions and they can trade their unused quota with one another. This method is supposed to ensure that carbon is cut at the lowest possible cost.

The US is moving closer to setting up a federal cap-and-trade system. An attempt last month to pass a bill for such a system fell foul of procedural obstacles, but many believe a similar bill will be brought forward again under the next president, when it is likely to have more chance of passing. Barack Obama and John McCain, the presidential candidates, both support a cap-and-trade system.