Timing is everything in the derivatives industry. In the case of IncubEx, which develops financial products in environmental, climate risk and related commodity markets, the company appears to be right on time.
In an interview with John Lothian News at FIA Expo, Dan Scarbrough, the founder, president and COO of IncubEx, described his start in the industry with the Chicago Climate Exchange more than 15 years ago. The Intercontinental Exchange bought the Chicago Climate Exchange and its parent company, the Climate Exchange, in 2010.
But the current interest level in the broad environmental commodity space is unprecedented, he said.
Scarbrough worked for ICE until the founding of Incubex in 2016 as an accelerator in the environmental market sector. Since then, IncubEx has launched more than 30 new contracts on the Nodal Exchange, its European Energy Exchange (EEX) partner exchange in the U.S., as well as in the European carbon futures markets.
“The recent, both public and private, commitment to sustainability is fueling these markets tremendously right now,” he said. Interest levels in the contracts are at all-time highs across the exchanges.
Scarbrough was a panelist at FIA Expo earlier this month at its “Sustainability/ESG and Markets” session. The panel focused on what ESG means to the investment community and to its end-users, he said. It also honed in on how ESG impacts these companies, and how its scope is defined.
IncubEx’s core business is on the “E” (environmental) in ESG, and that’s certainly a key component of the issue, Scarbrough said. Not only was there a consensus among the Expo panelists that these markets are growing, a big focus was on the compliance markets as a key driver of setting price signals for the price of carbon, he said.
Compliance markets are generally government-mandated markets that set in place, either through legislation or a rulemaking process, a carbon cap-and-trade market, Scarbrough said.
Cap-and-trade markets help determine the price of carbon so it can be traded or bought to take it out of circulation.
Regulators place a finite cap on emissions — for example, in the EU, they have an emissions trading program that dates back to 2005 that focuses on the power sector and heavy industries and is currently about a 1.6 billion ton cap, Scarbrough said.
There are two such programs in the U.S., one in California and the other formed by a consortium of 11 states, the Regional Greenhouse Gas Initiative (RGGI) in the Northeast.
Scarbrough noted that since “at the moment, we only have regional carbon prices,” a lot of the panel’s conversation was about when we might see global carbon prices. “In my opinion, you have to start by getting the right set of local standards and getting some of the carbon pricing framework in place,” he said. That will set the stage for pricing on a global scale.