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Re-thinking the World's Largest New Derivatives Market
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| Michelle Chan, author of the report, explains carbon trading and the danger of an unregulated carbon market. |
As policymakers debate Wall Street reform, they are not paying adequate attention to whether new regulations will be adequate to govern carbon trading and the carbon derivatives markets, which many experts believe could become larger than credit derivatives markets.
Most proposed climate bills rely on cap-and-trade systems to achieve greenhouse gas reductions, and the Obama administration also prefers this approach.
FoE's March 2009 report, which was released before the Waxman-Markey climate bill was introduced, was one of the first critical analyses to characterize carbon trading as a massive new derivatives market. It finds that existing financial regulations, as well as those in major cap-and-trade bills, are inadequate to govern carbon trading, creating a potentially huge regulatory gap.
It also outlines how lessons from the current financial crisis apply to carbon markets. In particular, it raises concerns about "subprime carbon," risky carbon credits based on unsuccessful offset projects (projects designed to sequester or reduce greenhouse gases).
Subprime carbon credits may ultimately fail to reduce greenhouse gases and, like subprime mortgages, could collapse in value, yet they are already being securitized and resold in secondary markets. The report recommends that lawmakers include carbon trading in current debates about financial reform, and warns against hastily creating carbon markets without proper oversight.
Read about our report in The Wall Street Journal's blog and Houston Chronicle.
See pictures from a March 2009 Ways and Means Committee Hearing, where Michelle testified,
Learn more about carbon markets.
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