No summit of global leaders would be complete without a debate on climate change – the biggest obstacle facing modern man. As Countries and Companies have no choice but to “go green”, carbon markets will play an increasingly vital role as environmental regulators tackle the global warming crisis. Some analysts have labeled carbon markets as the next big thing for commodities trading and derivatives markets. However, these markets are still developing, as the World’s two biggest players – the US and China have yet to join the fight against climate change.

Carbon markets originated under the Kyoto Protocol, the world’s biggest international environmental treaty, which aims to cap the emissions of greenhouse gases by industrialised Countries. The Protocol allows for international emissions trading as a flexible way for these Countries to meet their commitments under the treaty. As it stands, the majority of the 187 member states of the Protocol delegate their emissions targets to individual industrial Firms, such as a power plant or paper factory.

Under a system known as a “cap-and-trade” scheme, Firms that expect to exceed their quota of emissions can buy carbon credits from another party which has successfully reduced its carbon emissions to a level below its limit. These credits can be bought from a broker (such as a bank), a United Nations Clean Development Mechanism (CDM) or Joint Implementation developer or through an exchange such as the EU Emissions Trading Scheme (ETS).

While carbon markets have been expanding globally particularly in the past five years, carbon trading still remains relatively limited in the US and China, the world’s biggest emitters of carbon dioxide, who interestingly have not signed the Kyoto Protocol. The US has yet to develop a mandatory trading programme for greenhouse gas emissions, though environmentalists have been lobbying for the approval of a clean-energy bill for some time. Environmentalists hope to transform US industry with the introduction of a cap-and-trade system — forcing the biggest Companies to calculate the amounts of greenhouse gases they emit and then pay for them.

However, many US Firms like Ford Motor Co (NYSE: F) and DuPont Co (NYSE: DD) have begun to voluntarily reduce their carbon emissions – bearing in mind that changes in regulatory environmental regulations are inevitable and that that sustainable development and good corporate citizenship make good business sense. Currently, the Chicago Climate Exchange (CCX) is the biggest voluntary exchange that trades carbon emission credits in the US.

Apart from carbon credits, a “greener” environment can also be achieved through carbon offsetting, whereby Companies counterbalance the effects of carbon dioxide emissions by investing in renewable energy projects, typically in developing countries. In this market, financial institutions play a similar role as in the market for carbon credits, setting a platform for a brand new revenue stream for financial institutions. With carbon offsetting, financial institutions invest in alternative energy such as wind and solar power, and lend these energy sources to environmentally conscious Firms who find it more cost-effective to “go green” in this way. With its recent acquisitions of renewable energy Companies, ClimateCare and EcoSecurities Plc, JPMorgan Chase & Co (NYSE: JPM) is well-positioned to be a leader in the carbon offset markets. JPM joins other global investment banks like Barclays Plc (NYSE: BCS), Citigroup (NYSE: C) and Goldman Sachs Group Inc (NYSE: GS) who have also entered carbon finance.

JPM is currently testing the waters by supplying Ugandan villages with energy efficient stoves and reaping the benefits in the form of carbon credits. According to the head of the Bank’s credit origination in Africa, Tom Morton, “the stoves reduce demand for non-renewable wood, as well as reducing greenhouse gas emissions from the charcoal making process, which is why they attract credits”. The credits will be sold mostly to Tata Motors Ltd’s Land Rover, which boasts one of the most impressive carbon offsetting programmes in the auto industry.

For Jamaica, which has an unsustainable dependence on imported petroleum to satisfy more than 90 per cent of its energy requirements, the potential to benefit from carbon markets is huge. Already, the Government of Jamaica (GOJ) has made strides with regard to renewable energy and energy-efficiency projects. The most notable of these, is the creation of the Wigton Wind Farm Ltd, a subsidiary of statutory organisation of the Ministry of Energy, the Petroleum Corporation of Jamaica. Wigton is registered by the United Nations’ Framework Convention on Climate Change, and has been trading carbon credits under an Emissions Reduction Purchase Agreement with the Dutch Government since 2005.

Just last month, ground broke in Manchester for Wigton Wind Farm Ltd’s US$50 million expansion project, that will further reduce carbon emissions, significantly increase electricity production and save the country millions of dollars. The expansion of the wind farm will also assist the Country in meeting its renewable energy target of 15 per cent by 2020. Currently, only five per cent of Jamaica’s energy comes from renewable sources.

Apart from the efforts of the GOJ, private-sector organisations have begun to step up to the plate, contributing to energy sustainability. Jamaica Broilers Group Ltd’s (JBG) recent foray into ethanol production, not only provides the Firm with a diverse revenue stream, but has also resulted in cost savings and the generation of fewer greenhouse gases. The Jamaica Public Service Co (JPS) has also partnered with the PCJ, in an effort to utilise Renewable Energy Technologies (RET). JPS purchases in excess of 20 megawatts of energy from the Wigton Wind Farm, an amount that is expected to increase to 38.7 megawatts with the completion of the wind farm’s expansion this July.

Certainly, as the pressure mounts for the US and China to implement a mandatory programme for reducing emissions, real opportunities exist for global businesses and financial institutions to enter the carbon market. Therefore, it’s worthwhile for Companies to position themselves now to in order to reap future gains.

Kimberly Thelwell is a Research Analyst at Stocks & Securities Ltd. You can contact her at kthelwell@sslinvest.com.