Potential pitfalls in carbon trading

The carbon trading market is close to taking off on a global level. In 2006, global sales of the credits hit $5 billion, twice the volume from the previous year, according to the World Bank.

However, there are many pitfalls companies must navigate around. In a recent CFO.com article, Jeff Goff highlights his main concerns.

Companies do not yet understand the complexities of carbon credits

In the main, finance chiefs seem blissfully unaware of the disconnect. In fact, most CFOs don't seem to be paying any attention to the emerging complexities of carbon credits. Such ignorance could prove costly to shareholders. A growing number of state emission mandates, such as those imposed in California, are already beginning to create regulatory headaches for some businesses. Federal carbon caps, expected within the next three years, will raise the pain to a whole new level.

Uncertainty in how the CO2 market will pan out

A few finance managers, with an eye toward coming national regulations, are already purchasing high-quality offsets at relatively low prices. When federal legislation hits, the clutch of credits could be turned into a source of windfall profits for their companies. Conversely, CFOs who don't understand the complexities of carbon commodities could find themselves paying high prices for low-quality offsets in a seller's market. And make no mistake, federal carbon legislation will almost assuredly trigger a steep rise in the price of CO2 credits.

Limited supply on Renewable Energy Credits

One offset those regulators will likely recognize are RECs [Renewable Energy Certificates], which are derived from clean energy sources like wind farms and hydroelectric power plants...Sales of RECs have taken off, with Whole Foods, FedEx Kinko's, Starbucks, and Patagonia among a host of corporate buyers. Green-e, which certifies about half the sales of RECs in the United States, reports that sales of Green-e certified RECs doubled in 2006. But purchasers say demand appears to be outstripping supply. "The last two years, the REC market has been workable," notes Jay Dietrich, climate stewardship program manager at IBM. "But the market is changing. The supply of RECs is slowly being tapped out."

You can read John Goff's entire article here.