ACID RAIN: Trading pollution permits helped reduce the sulfur dioxide emissions from power plants that led to acid rain, which damaged trees, lakes and other ecosystems throughout the U.S. Northeast Image: © iStockphoto.com / Marek Mnich
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NEW YORK—There are any number of ways to make money trading, though some prefer the term gambling.
That's because the financial world is full of innovation these days—even in the wake of the Great Recession—which primarily means inventing new instruments to trade. One can still trade the mortgage-backed securities that helped derail the global economy or corporate debt repackaged as bonds. Enron helped pioneer the trade in "physical" electricity, actual power available for purchase on the grid and only physical in the sense that the infrastructure to transport it is more visible than an odorless, colorless greenhouse gas. Both are now lucrative markets, but certainly electricity, despite its physics, is more stable.
So why would David Nussbaum, an unassuming middle-aged trader from New Jersey, switch from this steady market to one that doesn't even really exist yet in this country or, more frequently, is completely voluntary? "People thought I was nuts," Nussbaum said. "I'm not a tree hugger, but this is something above and beyond just a financial transaction. It's reducing the world's carbon emissions."
Nussbaum has a chocolate bar on his desk wrapped in a fake $1,000,000 bill. It's a payment from his boss at Evolution Markets for closing a deal that he didn't think could be done. And all the Blackberries, Etrali super-phones, laptops and monitors—a constant stream of communication and information—pale in significance to the most important trait a carbon broker can have: The ability to "smell BS" as Hochschild put it, even more important than speaking any of the multiplicity of languages carbon is traded in today.
"Agreeing on price, quantity and delivery is only half the battle," Nussbaum said. "The devil is in the details of these trades."
This market is uniquely dependent for its very existence on governments—and in the United States, the government appears divided on how to proceed. Different bills linger in the House of Representatives and Senate with little chance of passage while the EPA plods forward with regulations to cut CO2 emissions. The EPA "doesn't know what's going to happen on cap and trade. The President doesn't even know," observed Lenny Hochschild, Nussbaum's partner in carbon at Evolution. "The hardest part is being reliant on a political process which doesn't appear to be incented towards what is good for America. The single biggest problem is regulatory uncertainty." In other words, nobody knows what the rules of the game will ultimately be.
As goes the United States, so goes the global market. Nussbaum has a cartoon on his desk that neatly summarizes the problem. A bespectacled, gaunt U.N. negotiator says "Avoiding climate change requires cooperation from everybody." His translator says: "We're screwed."
Or, as one broker who declined to be identified said: "It'd be nice to be in a market that's not created by a government."
Yet, the very complexity of the rules created by governments—whether the Clean Development Mechanism enshrined by the Kyoto Protocol, the fuel emission analyses in California's climate change law, or the arcane necessities of the 40-year-old Clean Air Act and its potential to impact on U.S. emitters of greenhouse gases—keep the brokers in business. No one can figure out what the rules are.
Of course, that creates problems too, not least the incessant hand-holding, whether that be in the form of cursing out a trader at a financial firm or loudly lamenting the stupidity of a would-be participant to said participant—a situation common to all commodity markets, at least judging by the occasional bombast from the coal or weather desks. "This is so asinine, it's ridiculous," one broker barked into the phone to a client, who is failing to complete a deal because of a missing fee.