Environmental Finance recognized Morgan Stanley as the Best Trading Company in the sulfur dioxide (SO₂) and nitrogen oxides (NOx) categories of its 2003 Market Survey rankings. The top ranking demonstrates both the Firm's expertise in emissions trading, and the growing importance of these markets for our clients and our environment.

Morgan Stanley retains its unique position as the only investment bank in the U.S. engaged in emissions trading, a growing commodities market that allows companies to buy and sell Environment Protection Agency credits for emissions of certain pollutants. The year 2003 was the first full year of the Firm's participation in emissions trading as a proprietary trader and market maker.

According to Nancy King, Managing Director, Fixed Income and Head of Emissions Trading, the Firm's success in emissions trading is a result of its depth of experience in energy trading. "We're more naturally inclined to this market than other firms because of our trading and risk management capabilities in traditional energy markets," she said.

Risk management capabilities are especially important to Morgan Stanley clients as emission regulations grow more complex. "The companies involved are still learning what emissions controls make the most sense for their business needs," said King. "So our role is not only buying and selling credits, but also helping our clients determine whether to implement emissions control technology and sell off excess credits, or to buy credits now."

SO₂ trading is a national program mandated by the Environment Protection Agency. SO₂ is produced primarily by coal-burning power plants. NOx trading primarily covers states in the Northeast, but is expanding to a 24-state region in the eastern U.S. Like SO₂, most NOx emissions come from power plants, but some industrial manufacturers also produce NOx emissions.

Success in the SO₂ and NOx markets bodes well for the Firm's involvement in future emissions trading markets. These include the burgeoning regulation of greenhouse gasses in the European Union, and anticipated regulation of mercury emissions by the EPA. "We'll definitely be on the cutting edge of emissions trading in the future, because we have the capabilities to analyze potential markets," said King.

Ultimately, the Firm's participation in emissions trading comes from an understanding that the market model is the best method of regulation, benefiting both companies and the environment. "Emissions trading definitely works," said King. "Instead of forcing companies to enact the same controls, no matter what the cost, those who can do it most efficiently are rewarded by being able to sell their allowances. And anytime you give the market flexible programs that are still controlled by a cap, you're going to have better results."