Thursday, May 08, 2008

Carbon Credit Market Offers Exciting New Derivative Risks

According to a report on CNet, the United States' first carbon exchange market is set to go live on September 10th of this year.

CNet: A crack at pricing carbon in the U.S.

The Regional Greenhouse Gas Initiative (RGGI, pronounced "Reggie") is scheduled to go online September 10. It's a cap-and-trade system for carbon that electric power generators in 10 Northeast states need to participate in.
The way a carbon cap-and-trade system works is that participants have to purchase allowances that allow them to emit a certain amount of carbon dioxide.
These allowances can be bought and sold. So if a power generator buys the right to emit 40 million tons of carbon, but manages to fall under that threshold, the company can sell those credits to a power generator that has gone over their ceiling.

What's fantastic about trading carbon credits is that it kills two birds with one stone: by creating a thrilling new three-card monte game derivatives market that will allow players who bet in the right direction to amass huge amounts of cash while at the same time allowing everyone involved to bask in the radiance of the illusion that somehow the world is being made a better place at the same time. This is the kind of high-volatility market that can appeal to everyone from overcaffeinated energy traders to brie-eating Volvo drivers! That sort of unifying effort is to be applauded.

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