Despite global recession, reports show the carbon market is booming, up 124% in volume terms and 22% in terms of value. And unfortunately, we might be looking at another bubble.

A Friends of the Earth report, cap and trade is just another derivatives market. "Currently, most carbon is sold as futures or forward contracts, a type of derivative,'' the report says. "These contracts contain promises to deliver carbon allowances or credits in a certain quantity, at a certain price, by a specified date ... In a carbon bubble, unscrupulous intermediaries may overpromise on offset projects by selling future credits based on projects that do not yet exist, are not additional, or which simply do not deliver the promised GHG reductions. This would not only have financial
impacts, but also environmental consequences, as economies fail to meet GHG reduction targets."

As Martha C White at Reuters points out, there are serious concerns whether the Commodity Futures Trading Commission can handle the job. "A big reason the real estate crash was such a colossal mess is that no one was regulating the most exotic-and most in need of regulation, many would argue-derivative instruments like the credit-default swaps that almost sunk AIG (AIG). Is it reasonable to assume that a carbon market, especially one that's being built essentially from scratch, would have stopgaps and safety valves built into its infrastructure?"

To stop the bubble happening, governments need to move now with pre-emptive laws and regulations. The Obama administration has vowed to clean up Wall Street. It should also look at the carbon market.