Editor's note: Adcock will be presenting at the Corporate Climate Response conference, which takes place September 25-26 in Chicago. For more information, click here.

Among lower margins, resource-intensive regulations and fierce global competition U.S. manufacturers are driven to find new ways to impact the bottom line and keep shareholders content. When process efficiencies and technology projects have maximized their ability to drive cost reductions and bottom line results, organizations need to look elsewhere for new revenue streams and the answer may be as simple as 'going green'.

Here in the U.S., the market is facing unprecedented scrutiny around business operations and their impact on the environment. Fearful of lawsuits, compliance infractions and ongoing business sustainability, companies have been spurred to action, seeking out ways to become environmentally friendly. However, besides avoiding lawsuits and improving a corporate image, 'going green' can also spur tangible bottom-line profit.

Many companies are actively working to decrease their carbon footprint -- Nike, Caterpillar, Ford -- the list of companies greening their portfolio reads like a who's who of the Fortune 500. For these manufacturers, going 'green' is truly a business decision. In addition to mitigating risk, organizations can actually make money by trading carbon credits or renewable energy credits (RECs) with other companies.

Here's how it works. A carbon credit comes in many forms, but two basic types are "allowances" (rights to emit greenhouse gases issued by governments) and credits generated through actual emissions reductions accomplished through projects (so called "project-based emissions credits"). In the U.S., voluntary emission reductions are typically based on project-based emissions credits, and organizations can be on either the supply or the demand end of a carbon transaction.

On the "supply" end, companies could be generating Verified Emissions Reductions (VERs) or Renewable Energy Credits (RECs) through projects like: direct fossil fuel reductions via energy efficiency projects, on-site power generation utilizing renewable energy to displace grid-generated electricity, methane capture and power generation from landfills, methane capture from livestock waste, and other activities that the company is undertaking but is currently not monetizing.

Note that these projects and activities would have to be verified or certified through specific carbon accounting tools and protocols. On the "demand" side of the transaction, companies can purchase VERs or RECs to meet voluntary emissions reductions goals (e.g., part of a corporate "greening goal"), but should note that both of these commodities have verification/certification standards, shelf lives, varying price ranges and quality, etc., and consumers should be aware of these issues before making a purchase.

So all of this begs the question: what is the best way for companies to buy and sell carbon credits and renewable energy credits? Before diving into the market, there are two issues that the green corporate citizen should bear in mind:

  1. the carbon market, like any market, has risks, and the savvy green shopper will want to hedge those risks, and
  2. the venue for trading carbon matters a great deal.

Risk Hedging

There are issues on the carbon horizon that a risk-wary green shopper should bear in mind. Most notably, the terrain of the carbon landscape is still evolving and will continue to evolve over the next coupe of years. State-level greenhouse gas schemes such as the Northeast's Regional Greenhouse Gas Initiative, potential future federal cap-and-trade schemes, and a post-Kyoto Protocol framework are all in the legislative and negotiating bullpen. This means that companies seeking to prepare themselves for future caps -- or seeking to be recognized for "early action" mitigation strategies -- are going to have to ensure that the commodities they are trading in will be relevant (transferable) in a compliance-driven market.

Companies should be aware that while some carbon credits have been validated under internationally recognized standards, others have been validated under schemes that may not transfer into a regulated, carbon-constrained world. Examples of verification standards that are generally accepted by the carbon community include the Greenhouse Gas Protocol developed by the World Resources Institute and the World Business Council for Sustainable Development, and the "Voluntary Carbon Standard", a verification standard created by the International Emissions Trading Association working in partnership with several other respected organizations.

Trading Venue

Like any other market, trading mechanisms matter. The green space was originally dominated by brokers, but increasingly, the market is moving toward a different venue - carbon auctions. Why? Because carbon brokers have tended to collect relatively high margins and offered relatively little in the way of price discovery and transparency.

This model has become increasingly inappropriate as the carbon market increases in size and sophistication. Instead, the market is turning toward exchanges capable of running structured transactions -- structured because commodities (described above) are not yet uniform and thus require a great deal of product specification to ensure that the buyer is clear on what is being purchased. The World Green Exchange, for example, handles structured events involving emissions and green energy credits (worldenergy.com). The value-add from entities like this one is that they offer transparent price discovery, a measure of liquidity, and an efficient trading mechanism -- elements that a traditional brokerage scheme generally lacks. In essence, these exchanges allow the market to hone in on a reasonable price range that reflects market value, which is an important step in the evolution of any emerging market, and carbon is no exception.