Mercury may be the next big environmental derivatives market because of U.S. Environmental Protection Agency regulations that will launch a cap-and-trade program to cut emissions from coal-based power plants. Mercury contracts could be traded in two years despite the regulation's 2010 implementation date, said Eric Klein, a coal and emissions broker with Tradition Financial Services in New York. Corporates are already looking to cut emissions in order to generate extra mercury credit through early compliance, added EPA spokesman John Millet in Washington, D.C.
The EPA's Clean Air Mercury Rule paves the way for the world's first mercury market and follows increasing trading in emissions instruments, such as carbon allowances in Europe (DW, 8/13). The mercury market will likely develop along the same lines as sulfur dioxide trading. The first SO2 trade was put on in 1992, three years before companies had to comply with SO2 emissions reduction regulation, according to a report published by Peter Fusaro, chairman of the Global Change Associates in New York. That market, which Fusaro now values at about USD8 billion notional, also gained momentum through a cap-and-trade program.
Mercury trading could be especially attractive because emissions levels between plants vary much more than other pollutants. Michael Durham, president of ADA Environmental Solutions in Littleton, Colo., explained, "If there is a cap-and-trade program, there could be a pretty significant trading market for mercury because it will probably have the greatest differentiation in plant-by-plant costs than any other pollutant we have ever had to deal with." This differential lends itself to robust trading, he said.
Klein said the market will take off once the regulation is finalized. The EPA has already allocated mercury emission to states, noted Millet, adding he expects states to begin planning compliance by the summer.
Millet did point out one major bump in the road: a law suit brought by nine states, including California and the tri-state New York area, against the federal government looking to invalidate the mercury rule because it's not tough enough. This could postpone the implementation date. But according to Fusaro, "[The EPA] put the stake in the ground." He described the market for mercury trading as in formation, adding, "It will fly."