The CFOs of any company that uses or produces energy were naturally interested in the outcome of the recent Copenhagen round of global climate negotiations, for both the potential new costs and new opportunities. Although the conference did not lead to the legally binding global carbon reduction treaty that a lot of climate watchers had hoped for, many are still watching closely as regional (rather than global) carbon markets continue to evolve. For despite the uncertainty in Copenhagen, current global carbon market arrangements will probably survive. The pricing that these markets set for carbon emission allowances will continue to be increasingly important for businesses—in particular, those facing the cost of buying allowances (so-called carbon credits) or developing projects for which carbon credits are anticipated sources of revenue.
Emission caps and related carbon trading in developed nations are a very effective way to reduce carbon emissions if supported by other forms of regulation, such as energy-efficiency standards. Moreover, developed nations will continue to be bound by domestically defined emission caps and can trade their carbon allocations among each other and through the offset market for developing nations.
However, the role of carbon markets in developing nations (through offset financing) is still unclear and might be relatively limited compared with their role in developed nations. The difference is a result of both the large potential of and requirements for emission reduction in developing countries and the limited demand for offsets from developed nations, given the current proposals on the table. This imbalance may limit the ability of companies in developed markets to benefit from offset credits for investments in developing nations. Indeed, if carbon markets do not take off in developed nations in a major way, companies could be left holding credits for which there is no demand.