Climate Change and Financial Markets: Regulating the Trade Side of Cap and Trade

An economy wide cap-and-trade system to limit the nation's greenhouse gas emissions would create a large new financial market. Unlike other markets that typically evolve over time, a national greenhouse gas cap-and-trade system would be worth hundreds of billions of dollars at the outset. A market of this size requires attention to both the market risks and the political risks associated with the design and operation of a new financial market. Congress has the opportunitiy to guide the development of the market, incorporating best practicies in market regulation and building on lessions learned from recent market failures.