Carbon trade may be the next bubble to cause crisis
November 10, 2009
By INGI SALGADO
Could carbon trading trigger a new financial crisis?
This is the view of environmental group Friends of the Earth, which warned last week that banks and investors are packaging carbon credits into increasingly complex financial products similar to the derivative products devised by bankers and blamed for the collapse of financial markets.
Carbon markets facilitate the buying and selling of certificates, each attached to projects that produce quantifiable reductions in emissions of any of the greenhouse gases that contribute to global warming.
Put another way, carbon markets facilitate the right to pollute. They are enabled by limits on emission reductions for countries, industries and/or companies. If the limits are exceeded, those obliged to stay within their bounds may purchase carbon credits, thus offsetting their emissions output.
Global carbon trading could, over time, grow into a multi-trillion dollar market if next month’s round of talks in Copenhagen for a deal on global warming expands on the cap-and-trade system.
Friends of the Earths points out (with some degree of accuracy) that carbon trading has done little thus far to reduce global emissions. The organisation’s view is that an expanded trading system won’t be able to deliver required cuts quickly enough to avert climate catastrophe. In a nutshell, a global carbon market risks a “double whammy of financial and environmental disaster”.
The South African business lobby, which favours carbon trading over carbon taxation, is not likely to back the alternative position of direct regulation through setting a price on carbon.
But whatever the merits or otherwise of a cap-and-trade system, other research appears to validate the position that carbon trading will be neither sufficient nor speedy enough to, on its own, secure the necessary funding to avoid climate catastrophe.
A United Nations Environment Programme (Unep) report last month on catalysing low-carbon growth in developing countries makes the point too: “It may be several years before the carbon markets reach top speed, generating the kinds of increased revenue streams envisaged.”
In the interim, Unep believes financial institutions with longer-term investment horizons can bridge the gap. After all, there is $12 trillion (R89 trillion) sitting in global pension funds and $3.75 trillion in sovereign wealth funds that could be directed to low-carbon investment.
The required level of investment to avoid climate disaster and adapt to climate change is extraordinarily high (but, it bears mentioning, not as high as the bank bailouts we have witnessed).
These are the figures Unep refers to: in the run-up to the Copenhagen talks, the maximum contribution under discussion by the public sectors of rich nations to finance climate-related initiatives in developing countries is $110 billion a year. But even if this amount was pledged in full, the developing world would still sit with an annual funding shortfall of $350 billion a year.
Unep’s projected shortfall is based on achieving a 50 percent cut in greenhouse gas emissions by 2050. Consider that this target sits at the bottom end of a range of cuts that the authoritative UN scientific body, the Intergovernmental Panel on Climate Change, said in 2007 was necessary to avoid climate catastrophe over the next four decades. Then consider that new evidence surpasses some of the panel’s worst-case scenarios. So the funding shortfall in developing nations could in fact be higher than $350 billion a year.
Assuming that enough of the large asset owners were to come to the party with finance, the pesky problem raised by Friends of the Earth persists: we may be in danger of repeating history by creating complex financial products, this time in carbon rather than mortgages.
It seems likely that further significant finance will be directed towards carbon trading, so the logical safeguard is to place sufficient emphasis on a new global regulatory system for banking to prevent such a recurrence.
|
|
