With healthcare reform on its death-bed, Congress is turning some attention back to carbon cap-and-trade legislation -- proposals that would cultivate a massive new market and the heap of jobs that go with it.
"This is poised to be the largest commodity market on planet earth, and I don't think that's something that any i-bank can ignore," said Tom Marcello, a carbon analyst at New Energy Finance, a UK-based advisory.
Marcello's employer is a good example of the upside of cap-and-trade. Formed in 2005, New Energy now has 125 analysts worldwide. In the past year, the company has almost doubled its New York staff, hiring Marcello and about seven other analysts.
That headcount might double again if U.S. lawmakers pass the 1,300-page cap-and-trade proposal that they have been chewing on. The House of Representatives OK'd the legislation in early July; and the Senate will pick it up when they come back from recess in two weeks.
Some pundits contend that the failure of health-care reform would increase the odds for cap-and-trade.
The U.S. version of a carbon cap-and-trade system would largely reflect similar markets in Europe, where governments hand out or auction a decreasing amount of carbon credits or allowances each year. Those who hold the credits can either use them -- by emitting carbon -- or sell them.
Proponents say that it is a more efficient way to curb pollution than regulating carbon emissions on a company-by-company basis.
Much like corn, pork bellies or sweet, light crude, carbon legislation would cook up a bevy of trading opportunities, including a suite of new derivatives and futures contracts.
Carbon-burning firms like utilities and manufacturers would need skilled traders to lock in credits and hedge for the future. Individual investors and brokerages would no doubt get in the game as well.
"It could be a wave of the future," said Michael Wong, analyst at Morningstar Inc. who covers investment banks and stock exchanges. "If the investment banks haven't developed an expertise on it in Europe, they will build it in the U.S., either by hiring people -- poaching people -- or training."
The voluntary carbon market, where green consumers and business buy "offsets" for their pollution footprints from renewable energy plants, is surging. It more than doubled last year to about $753 million, according to New Energy Finance.
Bulge Brackets Muscling in
is one of a few major finance firms behind that growth. In October, it bought a minority stake in BlueSource, a Utah-based company that captures and stores carbon. It has also agreed to buy the majority of the carbon offsets from E+Co., a firm that builds renewable energy plants worldwide.
Although Goldman confirmed those stakes, a spokesman declined to discuss whether the bank is preparing for a U.S. carbon-trading market.
Deutsche Bank, however, sees a potential pile of banking fees flowing out of carbon markets. Michael Hill, Deutsche's global co-head of natural resources, said cap-and-trade legislation would spark a wave of capital-raising and M&A activity.
Utilities, mining companies and metal plants would have to finance their carbon purchases and raise capital to buy or build renewable energy plants to offset their pollution.
At the same time, cap-and-trade would provide certainty to dealmakers that have shied away from certain sectors because of the uncertain expense of polluting.
"The cost of carbon will no longer be a question mark," Hill explained. "It will be a fact and in a short period of time the market can model that. Obviously, it's hard to do deals when people are unclear about value."
Hill would not speculate on the likelihood of a cap-and-trade bill passing this year, but he is preparing his troops for it all the same.
Uncle Sam Boxing Out
To what extent finance firms will be able to get in on the action is another big question. There is a move in D.C. to block so-called speculators from would-be carbon markets, as some lawmakers argue that prices should be exclusively set by the utilities and industrial firms that actually create carbon emissions.
Sen. Maria Cantwell, a democrat from Washington, filed a stripped down 22-page cap-and-trade bill that would largely box out finance firms.
Sen. Byron Dorgan, a democrat from North Dakota, opposes all carbon-trading proposals, arguing that they would be "a field day for speculation."
"It won't be very long before we have derivatives," he said in late July. "We'll have swaps; we'll have synthetic swaps. You name it; we'll have all of them."
New York Times columnist Paul Krugman called this kind of talk: "cutting off our future to spite Goldman Sachs's face." Krugman, like many economists, argues that outside investors are critical to creating a highly liquid market and tamping down volatility.
A Foot in the Door
Demand for carbon experts could skyrocket in the coming years. So, how does one become a carbon expert?
It helps to know something about macroeconomics, power generation, power distribution and energy-intensive industries like oil refining and aluminum smelting.
Marcello, who garnered a master's degree in public policy before joining New Energy Finance, said that his coworkers are a diverse lot, including a number of engineers.
"During training, they asked: 'Who studied thermodynamics?' and half of the room raised their hands," he explained. "I was a little jealous about that."
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