Banking giants launch world's first green derivatives exchange

The Green Exchange is to launch next year, introducing new financial instruments into the burgeoning global carbon market

Four of the world's largest investment banks yesterday joined forces to launch the first ever environmental derivatives exchange in New York.

Morgan Stanley, Credit Suisse, JPMorgan and Merrill Lynch have teamed up with ICAP, Constellation Energy and Evolution Markets to set up The Green Exchange under clearance from NYMEX Holdings.

The exchange, which will open in early 2008, will enable investors to trade futures, options and swaps in markets related to emerging green sectors, such as wind and solar power, biofuels and reforestation projects.

Initially it will trade contracts such as carbon credits included in the UN Clean Development Mechanism (CDM), voluntary emission reduction credits and carbon allowances from the European Emissions Trading Scheme (ETS).

Richard Schaeffer, chairman of NYMEX – the parent company of the world's largest commodities exchange, the New York Mercantile Exchange – said the venture would allow investors to cash in on the growing green market.

"The Green Exchange [will enable] customers to efficiently manage the cost of reducing their 'carbon footprint'," he said. "It expects to focus on both global and regional compliance trading while also building liquidity and demand for the highest quality voluntary standards in the market. Underlying all this will be the ability for all market participants to manage risk and take positions in environmental derivatives markets."

The move highlights the extent to which complex financial instruments are rapidly emerging alongside the simple buy and sell trading that has characterised carbon markets thus far. The new exchange is expected to provide a lucrative new avenue for investors to tap into the burgeoning carbon market, which is expected to be worth $3tr in the next five years.

Evolution Markets president and chief executive Andrew Ertel welcomed the new exchange, arguing that it would have a critical role to play in curbing carbon emissions. "Leveraging financial markets is an essential part of addressing environmental challenges and The Green Exchange is the right financial marketplace at the right time," he said.