In this transition, environmental issues, including greenhouse gas mitigation, are fast moving out of the confines of company environmental, health and safety departments and are becoming a topic of corporate business and financial strategy. We are witnessing important developments in the form of futures markets for property rights. Financial markets are being used to help address environmental concerns, and capital is flowing to these initiatives at an impressive rate. As carbon becomes a new asset class, these are truly exciting times.

Market-Based mechanisms, such as emissions trading, are becoming very important to corporations and investors, especially as societies approach a carbon-constrained future.

Much has been made about the apparent difference between European and U.S. views on climate-change policy. The general perception is that action on this issue is at a standstill in the United States. But the reality is quite different. Over the past few years, Europe has quietly embraced the concept of emissions trading as a policy tool to cost-effectively address climate change. Meanwhile, in the American heartland, the Chicago Climate Exchange (CCX) started continuous electronic trading in December 2003. These separate events point toward a common fact: Market-based mechanisms, such as emissions trading, are becoming very important to corporations and investors, especially as societies approach a carbon-constrained future.

Cap-and-trade emissions trading systems are successful from both environmental and economic viewpoints because they provide industry with the flexibility in method, location and timing of emissions reductions. Under these systems, participating carbon emitters voluntarily enter into a legally binding commitment to reduce emissions by 4 percent from an established baseline. Companies that cut emissions below the targets can sell allowances–the right to emit–to those that cannot make the cuts internally. Because the overall annual targets are below historic levels, a systemic reduction ensues.

In this system, the entrepreneurial skills of industry are harnessed for pollution reduction. Cap-and-trade provides direct financial incentives for least-cost solutions and technological innovation to reduce emissions. Programs such as the Environmental Protection Agency’s Acid Rain Program are based on the premise that trading can achieve significant emission reductions at costs far below those experienced under a command-and-control policy. The success of the Acid Rain Program so far has proven the practical outcome of this theory. All of the characteristics of a successful emissions trading program may be applied to greenhouse gases.

Australia, Canada and Japan are also aware of the need for action. In the absence of federal regulation, some Australian states are taking steps to set up trading schemes. Canada is considering implementing a cap-and-trade system to fulfill its reduction obligations under the Kyoto Protocol. Japan has been an active investor in reduction projects worldwide. It recently created its first carbon fund: the Japan Greenhouse Gas Reduction Fund.

In the U.S., a wide variety of promising policy initiatives is evolving. The Regional Greenhouse Gas Initiative, organized by nine Northeastern states, and climate proposals by Washington, Oregon and California are good examples. Twenty-eight states have promulgated statewide climate-change action plans. Furthermore, renewable portfolio standards, which require retail sellers of electricity to include in their resource portfolios a certain amount of electricity from renewable sources, now exist in 18 states. At the federal level, legislative interest in climate-change action has been on the rise, as indicated by a significant increase in the number of climate-related legislative bills in Congress. America’s private sector is also showing greater sensitivity to climate change. Large corporations have announced intentions to manage their greenhouse gas emissions, and have gone public in recognizing that profits and environmental stewardship go hand-in-hand.

The marketplace is also garnering tremendous interest from private enterprise. In the U.S., CCX administers the only fully integrated, multisectoral, rule-based greenhouse gas emission registry, reduction and trading system that also employs independent verification and includes all six greenhouse gases. CCX is the world’s first–and this country’s only–system for greenhouse gas emissions trading, and is the only legally binding framework in operation in North America. Since trading began two and a half years ago, total volume has exceeded 4.5 million metric tons. Baseline emissions of CCX members (250 million metric tons) currently account for roughly 8 percent of U.S. major stationary source emissions. The program helps build north-south links by allowing participation from Brazil and Mexico. Membership in CCX exceeds 100 diverse organizations, including leading companies such as Ford, Motorola, American Electric Power, International Paper and IBM; universities such as Tufts and the University of Minnesota; cities, including Portland; the state of New Mexico; and even farmers in Iowa and Nebraska.