The Ups and Downs of a Global Carbon Market

A single global price for carbon emissions is not likely for another 10 to 15 years because governments are dragging their heels on legislation and there are still many hurdles to jump. The European Union's executive Commission hopes to have a global carbon market in which emissions trading schemes are linked by 2020. It wants to see national schemes in all OECD countries by 2013 and for those to be linked by 2015. 

However, the recent meltdown of the carbon market in Europe has  highlighted the inherent instability in the system and also hampered green investment, because as long as the price of carbon remains low, industry will remain shortsighted, and not invest the necessary resources over the medium to long -term.  

Meanwhile the U.S. cap-and-trade bill is being negotiated with carbon permit auctions by the government expected to start from 2013.  In his latest budget proposals, U.S. President Barack Obama expects to generate some $646 billion in revenues from these auctions between 2013 and 2020.  Obama's plans have so far had no major impact on carbon trading in Europe, but in the long term it is highly probable these two markets will join up creating a vast pool of liquidity.   

Price expectations under a U.S. scheme are fundamentally different to what you expect for the EU. European prices will likely be higher, so if the schemes were linked by 2015, that would mean a one-way flow of (carbon permits) from the U.S. to Europe. 

Some believe this will create the largest derivatives market in the word, as it is projected that the market could read $1 trillion in trades annually by 2020, according to New Carbon Finance, a London research firm.  Proper regulation of a U.S. carbon market is particularly important given what’s happened in financial markets over the last year. 

Wall Street banks, hedge funds and institutional investors are under a rain of public indignation and regulatory scrutiny for their role in the current financial crisis. Many legislators are concerned that creating a carbon market may simply give the same players a new opportunity for manipulation and hazardous trading.

At the same time, those institutional investors argue their activities help to provide liquidity to the market - enough trading activity that helps both to define a price and give buyers and sellers of emission allowances multiple participants with whom to trade.

Just as sketchy home mortgages set the stage for the subprime mess in U.S. banking markets, sketchy environmental initiatives threaten to create a “subprime carbon” mess, environmental group Friends of the Earth warned last Thursday.  A cap-and-trade plan would create a huge new market in emissions permits at a time when Wall Street and Washington have their hands full figuring out how to police existing markets. One key element in all the climate proposals floated so far is the use of “offsets,” or the ability to purchase emissions reductions made somewhere else, which Friends of the Earth call in a new report, “Subprime Carbon”.

Strict fool-proof regulation will be essential to ensure derivatives do not ruin the carbon market as they have others. 

Carbon Trading: Can Money Grow on Trees

There is a new wave of entrepreneurs aiming to get rich by 
saving the rainforests. Richard Lofthouse reports

Ever wanted to get rich by doing absolutely nothing? In a bizarre way that’s what a bunch of new entrepreneurs and large corporations are trying to do. The formula is ridiculously simple: buy up or lease a tract of rainforest, prop up a deckchair and watch it grow. Put a financial price on its mere existence and sell a range of ‘products’ – called ecosystem services – to polluters. If trees could hear, they’d be setting up trade unions.

Is this the last and most crucial frontier in addressing climate change or a slightly daft get-rich-quick scam? Proponents stick one big uncomfortable fact to the pioneers of clean-tech, namely, that the most cost effective way to put the brakes on global carbon emissions would be to halt deforestation today rather than pour vast sums of money into whizzy new technologies, low emission cars and solar panels in Germany that would be 20 times more effective in the Sahara desert. They add that deforestation is accelerating, and that no government or charity has succeeded in halting it. 


Take money-man-turned-tree-hugger Hylton Murray-Philipson, whose London-based Canopy Capital recently struck a historic deal with the Iwokrama Reserve in Guyana, investing an undeclared sum of money to protect and manage a tract of 370,000 hectares of pristine rainforest. Terrified of the rapidly disappearing forest and acutely aware of the implications for his 11-year-old son, the 
ex-investment banker laments: “When conservation comes up against money, money always wins.”


Yet he wants a private sector, for-profit solution on the same basis, with one source of private capital trumping the other, turning the tide away from lucrative deforestation to even more lucrative conservation. “Unlike currencies, commodities or the share prices of banks, ecosystem services, with incalculable planet-wide significance, are presently rated at nil. The market in natural services that have an increasingly clear economic value can therefore only go up,” he says.


He and a dozen co-investors believe they will eventually reap a financial profit from ‘products’ offered by the forest, recognising that it regulates climate, stores water, sequestrates carbon dioxide, generates rainfall and preserves wildlife and biodiversity. These are the ‘ecosystem services’ that the forest provides. Now they just have to be valued monetarily, says Philipson. Historically, none of these planetary lifelines have been valued at all. Instead, the whole universe of investment and capitalism has revolved around exploitation of the natural world with none of the so-called ‘external costs’ of pollution being taken into account.
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