At least three regional U.S. groups are in various stages of development: Reggie, the Western Climate Initiative and the Midwestern Greenhouse Gas Reduction Accord (the latter two won’t be operational till 2012). A mandatory cap-and-trade program is in its fourth year in Europe. Trading volume there doubled last year, and prices have fluctuated, hitting $43 a ton at one point before sliding to $13 recently.

 

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How would a federal program work?

A regulator, possibly the EPA, would set an overall emissions goal. Obama has said he’d like to see emissions at 1990 levels (about 15% below current levels) by 2020 and then, by 2050, fall to 80% below the 1990 levels. Unlike Reggie, the federal program would target many industries — not just utilities.

A company that exceeds its cap would have to buy an allowance from a company that is under its carbon cap. That would set a price for carbon and provide an inducement to cut emissions. Companies might also get credit via “offsets” — planting trees, using new carbon-storage facilities, or installing technology to capture carbon. A company’s carbon “footprint” increasingly will become a risk factor that analysts and portfolio managers must assess when researching stocks or bonds.

Although much of the buying and selling will come from heavy carbon producers, the CCX and the CME Group’s Green Exchange have created carbon-price contracts that anyone with a standard futures account can trade. Some potential plays involve the big spread between the $13-a-ton price in Europe and the $3.50 in the U.S. If America adopts a mandatory program, that spread should narrow. There also have been individual bidders in the Reggie auctions who hope to profit as carbon’s price climbs.