Green Exchange International LLC, a unit of CME Group Inc.’s New York Mercantile Exchange, said the proposed U.S. climate law would limit trading because it includes price caps and floors.
“There are significant disadvantages to what has been proposed,” said Green Exchange Chief Executive Officer Tom Lewis in an interview in London. The caps and floors would limit potential trading profits and curb participation, he said.
U.S. legislation expected to be unveiled today by senators John Kerry, a Democrat from Massachusetts, and Joseph Lieberman, an independent from Connecticut, aims to cut emissions 17 percent below their 2005 level by 2020, creating a market for pollution rights and setting maximum and minimum prices. The floor would be $12 per permit, and the ceiling would be $25 in 2013, according to a draft summary obtained by Bloomberg News. More details are scheduled to be announced today.
A limit on over-the-counter transactions in the U.S. proposal would further curtail the market, Lewis said. When lawmakers force the entire market onto exchanges, “you force parties to set aside vast amounts of capital.” It’s better to allow OTC trades, which would improve volume and pricing and provide incentives for investment in clean technology, he said.
There is about a 5 percent chance that the law will pass this year, partly because American voters generally are more interested in reforming the nation’s financial system, which is blamed for the economic recession, Lewis said.
“We can’t look at this as if this is the U.S. legislation,” he said. “We will see significant compromise. I believe it can be improved upon.”
The U.S. proposal adds to uncertainty about the future of United Nations greenhouse gas credits. These Certified Emission Reduction credits currently can be used in the European Union. The proposal also calls for a new global regulator, said Henrik Hasselknippe, a managing director at Green Exchange.
“It is still uncertain how the U.S. will approve CERS,” or Certified Emission Reduction credits from the UN, Hasselknippe said today in an interview.
The U.S. proposal would ban use offsets from projects that combust a greenhouse gas known as HFC, he said. HFC can have a global warming potential of 12,000 times that of carbon dioxide.
HFC projects account for about half of the 408.8 million metric tons of CER credits issued so far under the UN’s Clean Development Mechanism, according to data compiled by Bloomberg.
Green Exchange, backed by the world’s largest futures and options exchange, aims to serve banks and utilities trading in the EU’s cap-and-trade program, established in 2005. Its arrival will increase competition with NYSE Euronext’s Paris-based BlueNext SA and Intercontinental Exchange Inc., which said April 30 it will buy the London-based European Climate Exchange.