Speculating on Carbon: The Next Toxic Asset

This paper reviews efforts within U.S. climate legislation and the UNFCCC to create a new carbon emissions derivatives market—which supporters claim is necessary to provide adequate capital for carbon trading. But proposals for a new carbon derivatives market include the same regulatory loopholes that led to excessive speculation on commodity futures markets in 2007 and 2008. If carbon markets are to be the basis for U.S. climate policy, then it is imperative to limit carbon trading only to emitters and offset project developers; create an independent body to set stable prices for allowance credits; and ban commodity index funds from bundling carbon.