Policy-makers' backing may see US carbon mart hit $1 trn by 2020

The US carbon market could be worth $1 trillion in 2020 if policymakers continue to back a comprehensive "cap-and-trade" programme confined only to domestic trading, a report from New Carbon Finance said.

According to these estimates, the US market could be twice the size of the European Union's Emissions Trading Scheme.

Under a "cap-and-trade" system, the government rations out the amount of carbon dioxide and other greenhouse gases that businesses emit by issuing them permits.

Companies emitting more than their limit may buy the right to do so from a business that emits less than its quota.

Developed countries are bound by the Kyoto Protocol to cut greenhouse gas emissions between 2008 and 2012 by a collective average of at least 5 per cent below their 1990 levels.

One way to cut emission is by buying certified emission reductions, or carbon credits, that are generated by clean development mechanism projects, which reduce greenhouse gas emissions. A project becomes eligible to sell one credit if it reduces 1 tn of greenhouse gas emission.

All 13 Bills calling for cap and trade in the Congress either prohibit or severely restrict the transfer of allowances from trading systems in other parts of the world.

If the US insists on only domestic trading of its emissions then it could lose out on cheaper carbon offset projects from developing countries such as India, China and Brazil, the report said.

"For the US market, it will rule out a significant source of inexpensive abatement, pushing the carbon price to unnecessary high levels," says Milo Sjardin, who heads the North American division of New Carbon Finance.

Prices for carbon credits could touch $40 a tonne around 2015 in the US, which could lead to a rise in domestic consumer energy prices.

It will also remove most US demand for international credits, hampering the growth of projects and technology transfer to developing countries, Sjardin added.