The Invoice Currency of Carbon Trading: Theory, Reality and Choices

　　Abstract: The long journey of becoming into an international currency often starts modestly. Customarily the currency has to first establish itself as an invoice currency, especially that in the energy trade. Based on a review of the transition from “coal-pound” to “oil-dollar”, this paper offers an assessment of the various choices of invoice currency in carbon trading. In this case, since the main factors determining the invoicing choice are: market share, financial market development and differentiation of carbon credits, the classical theory of tangible trade applies. Even if a carbon unit is a special right which, depending on the regulatory market under which it is created, already exhibits characteristics of both a commodity and a currency, it is not unforeseeable that given the current development, one (or perhaps more) invoice currency might eventually emerge as the choice currency in the carbon market. The classical theory of tangible trade postulates that the higher the market share of carbon trading, the more advanced the financial market development, and the higher quality its carbon credits, the more likely a country will price carbon in the its currency. This paper also discusses some cases-which involve looking into the role of Euros, Japanese Yen, as well as other currencies, in the formation of the “Three Islands of Stability”-consistent to this argument.