On June 26, 2009, the U.S. House of Representatives passed H.R. 2454, the historic American Clean Energy and Security Act of 2009 (ACES). Should the Senate pass a bill and the President sign it into law, the resulting U.S. federal cap-and-trade market would create an estimated six billion CO2 emission allowances annually1. This will follow numerous CO2 emission cap-and-trade markets launched in the past six years including the European Union Emissions Trading Scheme in 2005, the Regional Greenhouse Gas Initiative (RGGI) in 2009 and the Chicago Climate Exchange® in 2003.

As the EU, the U.S. and other large CO2 emitting countries launch cap-and-trade markets regulating their respective economies, carbon has the potential to be the largest commodity in the world,2 offering potential opportunities for investors and business owners to hedge, invest and capitalize on this emerging asset class.

In order to fully understand carbon markets, it is helpful to first understand the underlying legislation (or, in the case of the voluntary markets, the contractual agreement) that creates the commodity and the various factors that influence the price and volatility in the market. The purpose of this paper is to outline the fundamentals of cap-and-trade, provide a current snapshot of the diverse emissions markets across the world and to discuss the potential U.S. Federal cap-and-trade market.

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