Making a Market for Pollution

What does it take to trade in a commodity that cannot be seen or touched--and isn't even a commodity in the United States? First of three parts.

By David Biello and The Daily Climate 

NEW YORK—When convincing someone to trade in a commodity that cannot be seen or touched, it's best to hold their hand—even if only by telephone. Standing while talking helps, too, at least for broker Lenny Hochschild, who specializes in convincing everyone from agribusiness to electric utilities to buy and sell in a market that doesn't exist yet—a U.S. market for the right to emit carbon dioxide, the most ubiquitous greenhouse gas changing the global climate.
This is possibly the newest market in the world, a would-be global attempt to create a trade in the greenhouse gas emissions from any nation's fleet of cars, household refrigerators, electric power plants, factories, even farms. It's an attempt to peel back the smothering blanket of global warming by giving people a financial incentive to reduce emissions under an economic concept known as cap and trade.
The carbon desk Hochschild occupies is in the middle of five long rows of tables, buried under computer monitors, laptops and thick books of market arcana, that make up the trading floor at Evolution Markets, an "environmental" brokerage in White Plains, N.Y.
Hochschild got his trading start in more physical commodities: metals, specifically the so-called "base metals," such as copper. Of course, copper is the primary metal used around the world to move electricity and that's a route Hochschild followed as well, moving into energy products and, then, in 2003, starting to trade renewable energy credits—another government run market in chits that show a given electric utility has produced or bought a sufficient amount of electricity from renewable resources, such as the sun or wind, to meet a mandate.
The trading of any commodity—whether wheat, pork bellies or renewable energy credits—is essentially the same, but it helps to have an understanding of the reality behind the abstract: the color-coded blinking numbers on a broker's multiple computer screens that reflect current prices in a spread of different regional carbon markets, like the European Carbon Exchange. As a result, many emissions brokers are former traders of the commodities important to the industries that emit CO2—whether metals or coal, oil, and natural gas. After all, the use of those commodities gives rise to the carbon commodity—an emissions allowance—in the same way that burning coal releases CO2.
But Hochschild didn't move to the carbon market to save the world. "It's a market that's growing," he said. "It's a market that's doing what needs to be done and allows me to earn a decent living." In fact, the low volume, high margin market is responsible for 25 percent of Evolution's global revenue, according to spokesman Evan Ard.
The effort to create a national market for such CO2 emissions received a serious blow when the U.S. Senate abandoned the effort to pass a climate bill this summer. But worldwide markets are growing, and brokerage houses see potential despite the domestic setback: Worldwide, emissions trading was a $144 billion market in 2009, according to the World Bank, and 2010 figures to be even higher. Regional markets are spreading, notably on the West and East coasts of the United States. Europe's cap-and-trade system, the largest emissions trading scheme in the world and a pillar of the European Union's climate policy, has been up and running since 2005.
To be a broker like Hochschild is to collect a commission—and to convince two companies or, really, two people to exchange something in return for a fee. In Evolution's case they collect at least 3.5 percent of any deal, plus various fees. But what are the parties actually trading? In the case of the carbon market, it's the right to pollute the atmosphere with greenhouse gases.
Here's how it works: first the government sets a cap, or an overall limit on the amount of greenhouse gas pollution permitted. Then the government awards or sells permits to emit said pollution. Those companies that can reduce emissions below the assigned amount can then sell the excess to other companies struggling to meet the cap—this is the trade portion of the name.

... more to  scientificamerican.com