Personal Project Blog 1 - Carbon Options Exchange Concept

Originally, for my personal project, I planned to create a business plan for a web-based venture that would aim to encourage environmentally-conscious, or “green” consumption.  However, as a result of being forced to think through this concept more thoroughly within my blog posts, I have decided to slightly alter my personal project.  I have come to the conclusion that the only way consumers will purchase green products en masse is if these products are less expensive (economically) than their non-green equivalents.  The term “equivalents” is important in this sentence.  If a product is not a commodity, it will not neccessarily have a non-green equivalent, and thus it does not have to be less expensive in order for consumers to prefer it.  But, in general, I am assuming this rule holds true most of the time.

In order to make green products less expensive than their non-green equivalents, producers of non-green products must be forced to incorporate environmental costs into the prices of their products.  In the past, many countries have achieved this outcome through governmental regulation.  In the U.S., similar efforts have failed due to a lack of political will to enact such legislation.  However, I believe I can succeed where the government has failed by created a web-based derivatives exchange in which options on U.S. carbon credits can be bought and sold in a liquid market.  This market does not rely on the underlying U.S. carbon credit currently existing.  Instead, it relies on the belief by corporations and individuals that U.S. carbon credits will exist at some time in the future. 

After talking with a derivatives trader who trades NOX and S02 credits on the behalf of utilities, I have become aware that similar options on U.S. carbon credits do currently exist.  However, these options are created by banks and are traded over-the-counter.  An exchange for carbon options would provide less expensive and more transparent pricing.  As a result, utilities and other corporations would be attracted to the new exchange, and ultimately, the current “market price” of environmental destruction would begin to be incorporated into the products of producers who buy these options.   

The next step that I plan to take on this project will involve talking with the founder of The Plastics Exchange in Chicago.  This is a relatively new exchange that I imagine encountered many of the same difficulties that would be inherent to creating a carbon options market.  I’m hoping that this meeting will help me to generate the revenue and cost assumptions that will be needed to create a financial model within my business plan.