A two-level dynamic game of carbon emission trading between Russia, China, and Annex B countries

CARBON TRADING: ENVIRONMENTAL GODSEND OR GIANT SHELL GAME?

The lively debate over whether cap-and-trade really does much to fight global warming
by Jennifer Barone
From the December 2008 issue; published online December 3, 2008

Josh Margolis keeps a grueling schedule, brokering deals between buyers and sellers and forecasting how government actions could affect his clients. But his obsession is not stocks, or bonds, or oil futures. As co-CEO of the San Francisco–based company CantorCO2e, Margolis is part of an exploding branch of finance in a new commodity: carbon.
Mainstream financial institutions including Merrill Lynch, J.P. Morgan, Deutsche Bank, and Goldman Sachs are joining the booming carbon market, which continues even through the current economic jitters. According to the World Bank, global trades in this market in 2007 were valued at more than $64 billion, more than doubling since 2006. Skip Willis, president and CEO of Carbon Capital Management, a Toronto-based “carbon monetization” corporation, predicts that by the end of 2008 the global carbon trading system will have topped $100 billion. “This is a market that barely existed five years ago,” Willis says.

The carbon market was born out of the 1997 Kyoto Protocol, which mandates the curbing of carbon emissions. To comply, the 182 nations that signed the protocol must meet targets for reducing emissions of greenhouse gases—climate-warming gases that include the common industrial by-products carbon dioxide and methane. Meanwhile, many companies are participating in carbon trading voluntarily, either to build a green reputation or in anticipation of looming regulation. (DISCOVER recently did its own carbon-offset experiment; see the results on the bottom of the next page.) The United States never signed the Kyoto Protocol, but growing concern in this country over climate change may soon bring some form of regulation here, too. Joseph Romm, who served as acting assistant secretary of energy during the Clinton administration and now edits a climate policy blog as a senior fellow at the Center for American Progress, predicts that “the United States is clearly going to have a carbon trading system in the near future.” He notes that the president-elect supports such a plan.

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