CleanBeta

The Rise of Carbon Cowboys

If you think the mortgage-backed securities that has brought Wall Street to the brink of collapse seem a bit phony, hold on to your hat because cowboy capitalism is earning a new set of spurs in carbon trading markets.

The trouble is that nobody can say for sure what those spurs are worth. How much should we pay to emit a ton of carbon? How much should we be paid to get rid of one? If the current market meltdown has taught us anything, it is that markets only work when buyers and sellers know what they are buying and selling. In carbon markets, who knows what that is?

Lou Pai, the only Enron executive who survived the company’s collapse, apparently thinks he does. Pai recently paid a $31.5 million civil fine to the the US Securities and Exchange Commission to settle allegations of insider trading related to his tenure at Enron. Now, Pai appears seems set to take on the carbon markets. Pai is a major investor in Element Markets, a Houston based carbon trading firm, according to a recent article in Natural Gas Week. Element Markets did not respond to several requests for an interview.

Perhaps the trickiest item bought and sold on the still embryonic carbon market is the so-called carbon offset. Under the Kyoto Protocol of the United Nations Framework Convention on Climate Change, industrialized nations can use carbon offsets to meet their greenhouse gas emissions reduction targets. While the United States government has not signed the Kyoto Protocol, the U.S. private sector has pioneered a voluntary market for carbon offsets. Until the launch of the Regional Greenhouse Gas Initiative last week, which requires utilities in 10 U.S. states to meet specific carbon emissions reduction targets, the voluntary market was the only U.S. carbon market.

Last year, the global market for voluntary carbon offsets reported trades of 65 million tons of carbon offsets with an estimated value of $337.3 million. U.S. providers sold nearly one quarter of all the offsets traded globally. In the last three years, the supply of offsets from projects based in the United States climbed by roughly 66%, from about 6.2 million tons in 2004 to about 10.2 million tons in 2007. Ironically, Virginia and Texas, hardly known as hotbeds of environmental anxiety, boast the world’s two largest carbon offset projects.

In the past year and a half, the near-collapse of credit markets has encouraged the carbon market to get its act together.

In 2007, the world pumped nearly 8 billion metric tons of greenhouse gases into the atmosphere by burning fossil fuels. A little less than half - 3.2 billion tons - remains in the atmosphere capturing heat. Roughly two billion more tons are absorbed by the oceans. Nobody knows for sure what happens to the rest.

Forests, grasslands, plants and the entire carbon-churning biosphere called Earth absorb approximately 1.5 billion tons of carbon every year. Trying to identify the specifics about where and when and what absorbs all of this carbon is where the math gets messy. For better or worse, the blame belongs less to bad science than immature markets.

What that means is open to debate? Carbon offsets include so many different types of projects and different formulas for counting and verifying carbon consumption that the market needs better regulation.

But where some see big problems, others see big opportunities. Lei some see it as an opportunity. Lou L. Pai, the sole survivor of the Enron debacle, is moving into emissions reduction credit trading. Pai, who recently settled allegations of insider-trading by paying a near-record high fine of $35 million to the U.S. Securities & Exchange Commission, has bought a stake in Houston-based Element Markets, which specializes in carbon emissions trading and renewable energy credits.

While only a bit more than half of the states in the US now have renewable portfolio standards, voluntary REC markets have sprung up; and Element Markets says it has become active in both mandatory and voluntary markets.