US carbon market would be world's largest

New study estimates cap-and-trade scheme proposed in Lieberman-Warner climate bill would be worth $150bn in 2012

The current version of the US Senate's Lieberman-Warner Climate Security Act (CSA) would create the world's largest cap-and-trade emissions trading system, dwarfing its European counterpart and having a major impact on carbon prices globally, according to new research released this week.

The study from analyst firm Point Carbon claims that if approved the bill would result in 5.7 billion emissions allowances being issued in 2012, creating a market worth $150bn.

"A US market of nearly six billion emissions allowances is more than two and half times greater than the current European Union emissions trading scheme (ETS)," said Kjell Olav Kristiansen, director of advisory services for Point Carbon in North America. "The potential in a market of this size for both domestic and international parties is tremendous."

However, the report warned that the US energy sector would face major challenges in meeting the demands of a cap-and-trade scheme that aims to cut emissions to 70 per cent below 2005 levels by 2050.

It argues that meeting the target will require "a fundamental restructuring of the US economy and how it produces and uses energy" and warns that the scheme will initially result in a shortage of allowances that will lead to higher carbon prices as firms struggle to buy in credits to meet the newly imposed carbon caps.

US domestic offset credits are expected to make up some of the shortfall, but Point Carbon expects supply to be limited, forcing power generators to switch more of their energy generation to natural gas as the best way of delivering short term emission cuts. The net result is likely to be higher costs for energy firms and increased energy prices for customers.

The report also predicts that US firms will seek to buy in credits from the international market to cover the shortfall in US allowances, creating upward pressure on carbon prices in other schemes such as the EU ETS.

"While domestic initiatives will cover some of the reductions, the US will not be able to cover everything alone," predicted Kristiansen. "This means strong incentive for international cooperation and US participation in a post-2012 agreement."

The report came as Bank of America became the latest US business giant to issues calls for a US cap-and-trade scheme. Speaking at the North Carolina Emerging Issues Forum in Raleigh, North Carolina, company chief executive Kenneth Lewis said he favoured a federal cap-and-trade scheme that would set a market price for carbon. He also said the bank is creating a new environmental banking group that will focus on green investments.