Banking & Finance

Is Carbon Trading or Cap and Trade Dying On The Vine? (ICE, CME, NDAQ, BRK-A)

carbon-emission-imageOne of the Obama proposals to fight global warming and climate change may be up against the ropes.  This is emissions trading, or what the media calls “cap and trade.” There are many who consider this type of emissions trading to be the Holy Grail, and there are many who claim it does nothing other than create a business expense or hidden tax.  It could represent a huge new market for the IntercontinentalExchange, Inc. (NYSE: ICE) and the CME Group Inc. (NYSE: CME), as well as Climate Exchange plc (OTC-CXCHF) as the owner of the Chicago Climate Exchange.  Climate Exchange plc (LSE: CLE.L) is an AIM listed company which owns the world’s leading environmental exchanges.

We think that it is probably too early to call “cap & trade” a dead idea.  But what is looking more likely is that at best what will be headed to a Congressional vote is a greatly watered-down version of cap & trade.  If a watered-down version does not come first, then we have many reasons to believe that this may be an issue to debate in 2011 rather than 2009.

The Australians have been thought of as being more economical and sensible on this issue than Americans, and now they appear to be struggling with cap and trade issue.  The Australian government has now delayed its carbon emissions trading plan to 2010 after industry demands and pressure for more relief during a recession.

Cap and Trade could be dead, or if it is not dead it looks like the stage has been set for a watered-down version of it.  Berkshire Hathaway Inc. (NYSE: BRK-A) feels it is “monstrously stupid to do right now.”  That is what Vice Chairman Charlie Munger told CNBC’s Becky Quick why a carbon cap and trade system won’t work.  “Almost demented” was how he referred to it based upon what China and others are doing.  He thinks a different solution is needed such as the grid and he noted about the alternative energy solutions.

By the looks of it, climate contract values at the CCX look significantly lower than before, although there are other contracts that can be evaluated.  There is also an INTRADE “Prediction Market” for “Cap and Trade.”  While these contracts are very thinly traded, they do offer at least some insight into whether or not this becomes a real US market before the end of 2009, 2010, and even to 2011.  This is located under “BUSINESS” and then under “Cap and Trade” in that section.  This shows a pretty low chance for this being implemented as “A cap and trade system for emissions trading to be established before midnight ET on 31 Dec 2009″…..

The plans under the Obama administration appear to be coming into a bit more of a prioritization after the first 100 days in office.  The economy and all the problems with the banking sector, a budget and new tax plan, a war transfer from Iraq back to Afghanistan, and a push for some form of nationalized healthcare are a higher priority.

What that will end up being is not yet known.  If this does not come about during this year, then we are likely looking to beyond 2010 for any mandatory cap and trade.  That would coincide with “after the 2010 elections” and that would be based upon the outcome of how many seats in the House and Senate will actually change.  If the Democrats win more seats in 2010 and if Obama’s popularity holds up, then the cap and trade would have a much higher chance of being formalized in 2011.

If things turn downward for the administration, then a mandatory cap and trade market in the U.S. is probably going to get a new name of sorts.  The CCX will continue to have a place.  Currently it is voluntary and is full of many of the world’s largest utilities, manufacturers, power utilities, and more.  This allows firms to voluntarily purchase these contracts as an offset to their carbon production.

The camps on those in favor and those against are as far as apart as ever.  Many argue that it does nothing to discourage pollution.  In that argument, the stance is that this merely drives the price of business and taxes higher because the higher cost will get passed down to end users to pay for it.  There is even the argument that it just creates a financial market that allows businesses to just keep polluting by paying for it rather than getting EPA fines and having to face the negative publicity of that.

The arguments for it center around the financial impact creating an environment where companies are financially forced to lower emissions.  This money used above each buyer’s carbon cap could therefore be used to foster cleaner operations with lower emissions.

By the look and feel of this, it sounds like we’ll be debating the “cap and trade” issue longer than we’ll be trading off it.  At least on any mandatory basis.

JON C. OGG