Prediction of ‘sub-prime’ carbon market collapse dismissed as “misguided”

The report – ‘A Dangerous Obsession’ – says the trade in carbon permits and credits, mainly based in Europe, was worth $126 billion (£76 billion) in 2008 and is predicted to increase to a massive $3.1 trillion (£1.8 trillion) by 2020 if a global carbon market takes off in the way that the UK and other developed country governments would like to see.

The EU's proposed climate finance package – discussed by European heads of state at the Council of Europe meeting last month – envisages up to 80 per cent of global finance for mitigation and adaptation coming from the carbon market.

One of the things that Friends of the Earth is concerned about is that most carbon trading is carried out by banks and investors that profit from speculation on the carbon markets, rather than simply between polluting industries and factories covered by carbon trading schemes.

According to Friends of the Earth, carbon credits are being packaged into increasingly complex financial products, similar to the ‘shadow finance' around sub-prime mortgages which triggered the recent economic crash.

But Patrick Birley, ceo at ECX, the leading marketplace for trading CO2 emissions in Europe and internationally, disagreed: “The comparison between carbon trading and sub-prime financial issues is really rather misguided. Unlike the sub-prime mortgage market, carbon trading is a very simple and transparent activity that is conducted in the UK on a regulated exchange and is under the supervision of the Financial Services Authority.

“Ultimately in terms of ‘cap and trade’, it is the ‘cap’ that is the important bit, that produces real reductions in carbon output. Those caps are set by the Government and trading merely helps to establish a price in the marketplace, which is used to incentivise those that reduce their carbon output quickly and penalise those that continue to pollute at old levels.”

He added: “It is unfortunate. I always feel we are on the same side as people aiming for a low carbon economy and I sometimes think people get a little bit too focused on the trading side of cap and trade.”

In fact, the Friends of the Earth report is concerned about the cap side too, suggesting that existing carbon trading schemes are not delivering the emissions cuts promised.

The environmental group contends that carbon trading is also being used as a smokescreen by rich countries to avoid their legal and moral commitment to provide money and technology to help developing countries adapt to climate change.

"Pushing a world carbon market as part of a global agreement to tackle climate change risks a double whammy of financial and environmental disaster,” said international climate campaigner and author of the report Sarah-Jayne Clifton.

"Carbon trading is failing dismally at reducing emissions, yet allows speculators to grow rich from the climate crisis and hands politicians and industry a get-out clause for polluting business as usual.”

But Birley defended cap and trade as a mechanism for delivering reduced emissions. “You have to recognise that in terms of the Kyoto agreement, the only place where cap and trade schemes are in place is in Europe, and it’s only in place for five industries. Over time we hope that other countries will introduce cap and trade and the number of industry groups will in increase," he said.

“This is a multi-generational system that is being put in place and we’re only 20 months in. To be truly effective over time it’s going to be in place for at least 50 years.”

He added: “Europe will achieve its Kyoto targets partly as a result of cap and trade being in place. The reality is that a lot of countries will achieve their Kyoto targets because of the recession. The difference is that Europe would have hit its target irrespective of whether we were in recession or not.”

But Friends of the Earth sees carbon trading as a dangerous distraction. It wants the Government to use what it describes as “simple, direct and proven policy tools” like regulation, a carbon tax, and major public investment in greening the economy to reduce our emissions by at least 40 per cent by 2020, without offsetting.


"The credit crunch has taught us that Governments, not markets are best placed to safeguard our future – at this critical point in the fight against climate change, ministers must step in and lead the way with a new, direct approach to tackling carbon emissions to create a safe and green future for us all," said Clifton.