Although the climate change bill that would set the stage for a massive carbon credit trading market in the U.S. has yet to pass the Senate (its backers hope to get it passed before a summit in Copenhagen in December), the possibility that it will has Wall Street firms participating in and studying existing programs in Europe and regions of the U.S., hiring experts and educating customers about the new potential market.

The latest bill, sponsored by Barbara Boxer and John Kerry, would cut carbon emissions in the U.S. by 2020 from 2005 levels. It does not yet specify how carbon credits would be allocated.

At a debate on carbon emissions trading last night among potential market participants and energy market experts, it became clear that many are preparing for U.S. cap and trade.

"Customers are allocating resources to understand carbon credit trading and how to implement it," said Michael Cosgrove, managing director/head of commodities & energy brokerage, North America, at GFI. Cosgrove said he's thought a lot about how to expand his brokerage into the U.S. market, and plans to build out an electronic trading platform to accommodate the many players expected. His firm is recommending to clients that they familiarize themselves with the U.S.'s SO2 trading system [which was set up under the Acid Rain Program of the 1990 Clean Air Act].

Steve Schleimer, director of energy and environmental market regulation at Barclays Capital, said customers are changing the way they think about carbon emissions. They've been asking for information on timing, voluntary efforts and such. "In the last six months, companies have been taking a pre-compliance view," he said. "They're looking at what they can do now to hedge their exposure." Existing power traders will want to add carbon credit trading into their mix and want to know what's going on across all energy-related markets.

"There has been a steady stream of entrants from the U.S. into the European markets to learn about carbon credit trading," said Elliott Piggott, managing director of Trayport, sponsor of the debate. "These firms are building up information and getting themselves in position" for the new market.

Financial institutions have been playing a greater role in carbon trading exchanges, observed Keiron Allen, marketing and communications director for European carbon credit exchange BlueNext.

The panel was asked what lessons can be learned from existing carbon trading programs, such as the European Union's Emission Trading Scheme and regional initiatives in the U.S., mainly the Regional Greenhouse Gas Initiative.

Schleimer said experience with the RGGI shows that there's a need to have a realistic idea of what current emissions are and to what extent they need to be lowered. "RGGI was a good stab at cap-and-trade, but one problem is they set their caps in 2003; since then there's been significant reduction in emissions and because of economic factors, many of the power generators have switched to natural gas," which emits less carbon than coal-fired plants, he noted. Consequently, the power companies aren't hitting the cap of 140 million tons a year.

Yet Veronique Bugnion, managing director of trading analytics and research at Point Carbon, pointed out a positive lesson learned from RGGI: the program pioneered the use of auctions for selling carbon emissions, which is now a successful option in several programs.

The European Union scheme also, in the beginning gave too-liberal allowances for carbon emissions, noted Praveen Kumar, faculty fellow at the University of Houston. A key to success in the proposed U.S. program, he said, will be "having the political spine to set the right origin point." Also, he said, there needs to be clear transparency in the trading rules.

Another lesson from the EU program is that there's a need for a better flow and speed of information, said Piggott. "One problem has been that it's hard to determine how effective cap and trade programs have been; the timeliness of information is key," he said. Another problem in the European system is that approval of offset programs takes too long and there have been too many rejections.

A few other interesting points came up during the debate:

—Carbon emissions in the U.S. have lowered over the past two years, but this is attributed to the recession rather than to specific efforts.

—Carbon emission caps won't seriously affect U.S. polluters until at least 2014, according to Veronique Bugnion, managing director of trading analytics and research at Point Carbon. "In 2012 [when the proposed U.S. cap and trade rules would take effect] we see a market that's not hard to comply with," she said. [Based on existing programs, the tendency is to provide lenient caps initially, then make them a little tougher each succeeding year. Also, the Waxman-Markey bill allows carbon credits to be banked and borrowed outside of a trading scheme.] "We see a flawed and imperfect market. In Europe it took all of Phase One for people to learn how to trade. Those that need offsets [e.g. power companies] will know how to trade, those that receive credits they don't need, will need help learning how to trade. In 2014, the caps will start biting and prices for carbon credits will go up."

—It's not clear what offset efforts (initiatives to reduce carbon emissions) will count under the cap and trade program; these efforts will most likely be assessed by the EPA. "There's debate around this, it's a bit fuzzy," says Allen.

—Panelists expressed concern about how regulators will handle the cap and trade market. "The biggest uncertainty for me is how the regulators will respond, how will the CFTC get this implemented, what will the EPA's role be?" said Kumar. "If regulators print new allowances, that can muddy the markets. Simple, transparent rules would be best."

—Carbon credits should be traded both over an exchange and over the counter, panelists all agreed. In Europe, only 30% of EUAs and 15% of CERs are exchange traded, Allen said. "Europe's financial marketplace is working quite well," noted Bugnion.