By: Turnkey Trading Partners

Recently, President Biden signed into law several pieces of legislation intended to expand US competitiveness in renewable energy.  Prior to this legislation, many brokerage firms, particularly those with experience in brokering energy products, had explored environmental finance.  With the US government injecting tens of billions in new capital into the sector, opportunities for brokers and traders abound.  Turnkey has seen requests for brokerage consulting services related to carbon offset trading, solar credits, weather, and other carbon-based climate products explode. If you may be considering entering this market take heed.  This area of finance is still largely unregulated. Many transactions do not fall under the Commodity Futures Trading Commission’s jurisdiction. Rather, varying environmental protection agencies around the world dictate the rules governing these transactions. Uncertain regulation often creates uncertain market conditions.

For example, in May of this year, Zimbabwe, an emerging offset market for Africa, took control of its growing environmental finance marketplace. According to Reuters, without notice, Zimbabwe announced to market participants that it would begin regulating all offset transactions within its jurisdiction. This announcement led to turmoil in the global carbon market. Zimbabwe’s announcement that the government would take fifty percent of all revenue from carbon projects, limit foreign investor profits in such projects to thirty percent, and distribute the remaining twenty percent of profits to local communities caused market gridlock and extreme counter party stress.

Registrants looking to enter into environmental finance beware. The combination of unregulated markets with billions of dollars in volume and government spending at stake can lead to volatile consequences. For a more detailed look into this topic Turnkey covered Environmental, Social, and Governance (“ESG”) issues in June 2022. We’d encourage you to refresh yourself on what regulators have been contemplating in this area.  A comparative look at the crypto currency markets or the financial crisis of 2008 demonstrates that often history repeats itself.