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What Was Carbon Finance ?

Politics / Environmental Issues Mar 22, 2011 - 08:13 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleAs a leading investment banker put it: “Carbon is getting more and more difficult. A significant amount of the business that is done in the carbon space should shift”, which when translated from finance talk to human language means that the loose “consensus” on creating a global carbon tax, without calling it a tax and trading around this new asset has likely cracked beyond repair. The smart money is now beating a retreat from playing with carbon finance assets, and remaining players in the carbon market are seeking any way out they can find, as turnover on emissions markets goes only one way – down.

This is a major turnaround in a short period. What was always a fragile consensus on the urgency of using financial engineering to deal with the supposedly critical issue of global warming can be traced back to the 1997 Kyoto climate conference, involving 193 nations, and specially the European Union's 27 member countries. The unsure plan, which featured the introduction of greenhouse-gas restrictions and tradable credits to pollute in a future and hypothetical global carbon market, was made mandatory in Europe from 2005 but is now breaking down almost daily.

In particular the U.S. and China, the world's two biggest emitters of CO2 grapple over how, when, and to what extent they can reduce CO2 pollution – while steadily rising numbers of credible scientists set the question of whether CO2 is a pollutant at all. Are we going to treat CO2 like dioxin, pesticides, GM crop and nanotech wastes, asbestos, drug wastes, heavy metals, nuclear wastes and radiation – or not ?

The latest casualties of the death of the Kyoto plan are companies who bet they would get a turnover boost out of buying and trading credits to release carbon into the environment. Using leverage through derived financial products carbon finance boomers talked loud about a coming market able to rival the US$ 21 trillion market in crude oil, based on real physical oil shipments with a value less than $ 1.5 trillion a year at current oil prices. So far, in a now declining market, the carbon market is only a blip on finance trading screens. Banks and brokers traded 93 billion euros ($ 128 billion) of carbon credits and derivatives in 2010, according to New Energy Finance.

A growing number of leading edge new brokering ventures in the so-called carbon space, with nice names featuring keywords like “clean, green, ecological” have started closing down, firing staff and liquidating their remaining paper assets. Most are shifting to scoop up remaining national government incentives, subsidies and hand-outs for renewable-energy and recycling projects, develop new investor assets from these, and keep trading. Their hope is that in the absence of a global consensus, investors will channel funds into incentive programs set up in local markets, such as India, where they hope to make more money than they would have made from selling credits under a global, UN-sponsored plan.

Remaining and rearguard business communication used to defend this strategy argues the two biggest economies blocking progress on emissions, China and the USA, are ignoring the claimed constant rise in global temperatures, which last year matched the highs of 2005 when European carbon trading was made obligatory, and that droughts and flooding continue to wreck harvests from Pakistan and Australia to Brazil and Russia. Financial players particularly exposed to loss from continually declining emission credits value, such as Deutsche Bank warn that the price of carbon languishes at less than half the level it claims is needed to meet the UN’s aims for controlling global warming.

This rearguard action is however doing little to stem the tide of investor retreat. Intercontinental Exchange Inc., the voluntary-basis carbon trading platform set up in fanfare on the Chicago Climate Exchange shut down on January 31, while JPMorgan Chase shut down its carbon credit origination at several offices, and fired the staff it acquired when it purchased EcoSecurities Group Plc, the biggest carbon finance offset and derivatives developer. The Geneva-based International Emissions Trading Association says its membership has declined by nearly 20 percent since its international trading division was given a major public relations launch at the 2009 climate summit in Copenhagen.

Carbon emissions trading, and creating, distributing and selling a host of derivatives was hot stuff in the financial world as recently as 2009. Today however a typical comment from executive search agencies which placed steely-eyed high flyers committed to saving the planet in the 4-year window of good times around 2005-2009 now adopt a philosophical tone. “All the people I’ve seen who went into carbon trading have failed and moved out,” says Jason Kennedy, CEO of London-based headhunter Kennedy Associates, adding: “There’s not enough volume and not enough investment.”

Today these high flyers are constrained to downmarket. Current favourites can for example include designing biogas reactors, recycling car tyres or municipal rubbish and moving into niche activities like advising on sustainability and designing low energy downdraught housing, to scoop revenues from remaining players in the modest market for new energy and cleantech gimmicks.

Carbon trading is now a backwater of the global commodities market, not even included in the benchmark Dow Jones-UBS Commodity Index or other leading indexes such as Rogers International. Without institutional investors demand spurred by global emissions limits, the price of carbon can only languish compared with the constant and massive government tax and revenue base provided by the same fossil fuels that policy makers claimed they are aiming to marginalize in the fullness of time.

Killing the golden goose of a new tradable asset able first to be talked up, then materialized as paper chits with high nominal face values to entice unwary players, that is investors, shifts this failed scam from the realms of credible, to incredible. Derived products in the carbon finance space had already become more than usually unreal in the four short years of 2005-2009 during which they were marketable. They had included value creation based on the reliably fertile imagination of brokers and securities traders, extending through the hoped-for value chain stretching from the smoke stacks of power plants, to a motley crew of downstream and related carbon focus activities. When the bell rang 'Time up”, however, little or nothing was left behind, underlining that the carbon finance bubble was as classic as any other previous asset scam we have known.  

Chances are relatively high the carbon finance bubble, when fully collapsed, can be as unmemorable as the boom in rayon textiles. bakelite radios or VHS recorders – just one more failed attempt to create value. Alternatively, and depending on the trend for oil prices and the future of nuclear power, both of which are being played out right now on TV screens and Web sites worldwide, the carbon finance scam may be recovered, and recycled in mutant version.

What will be needed, to recycle and recover carbon consciousness above all features public relations, communications - and regular grade propaganda. Climate crisis of any kind is therefore critically needed, and could or might be the focus of energetic rearguard attempts at saving Sister Carbon by banks, finance houses, brokerage firms and their friends in government.

With nuclear power likely to languish under a Japanese radiation cloud for some while, and oil prices able to advance towards $150 per barrel as Arab dictatorships and absolute monarchies struggle to survive, the attraction for politicians of major oil and energy consuming countries to rebrand and relaunch soft energy may grow. In this scenario, carbon finance may be dusted off and recycled by government-friendly media, in an attempt to cajole consumers into using less energy, paying more for it, and liking it.

On this outlook the jury can only be out to lunch. Heroic attempts are underway to talk down the Japanese nuclear disaster, and limit oil price rises through designer bombing raids on the Tripoli bunkers of Colonel Gaddafi. With nuclear power restored as the official best and nicest solution to both high oil prices and global warming (and who cares if that is true or not ?), and Saudi Arabia's ruling elite given a nice long stay of execution, the need for carbon finance can naturally shrink and disappear- underlining the basic fact it was just another finance scam.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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