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The Observer: Where there's smoke… …there's money to be made in carbon trading, reports Conal Walsh: “…the likes of Shell and BP, are also involved.” (


Sunday October 17, 2004


CAPITAL markets can save the planet from global warming - and earn billions for financial institutions at the same time. That, at least, is what a growing army of City enthusiasts say about carbon emissions trading, the new way of making money from environmental restrictions.


Banks and brokerages are piling in to trade in 'pollution permits', an increasingly prized commodity as regulation tightens. Gas-guzzling industrial corporations will soon be scrambling to buy these credits, and with the launch of a formal European-wide emissions market in the New Year, the international community of 'carbon brokers' is about to come of age.


Permits equal to 1 million tonnes of carbon emissions were bought and sold in September alone, a twentyfold increase since the beginning of the year, according to consultancy Point Carbon. Russia's recent declaration that it will ratify the Kyoto protocol on climate change is sure to boost the market further, as will alarming headlines that last week suggested global warming has begun to accelerate rapidly.


Emissions trading is one of those unusual 'big ideas' that can claim a measure of support from environmentalists, businessmen and politicians alike. It follows a series of initiatives, usually led by the European Union, to reduce the amounts of carbon released into the atmosphere by factories, power plants, steel mills and even commercial office blocks.


The plan is for big companies to be given an 'allowance' of carbon they can emit. If a company exceeds its permitted pollution quota, it will face a fine. If, however, it beats its allotted target, it can sell on the remainder of its allowance to other firms, which use it to extend theirs.


From a government standpoint, the aim is to control - and gradually reduce - total industrial emissions while making it as easy as possible for the private sector to fall into line.


Currently, emissions trading is based on swapping carbon credits at a future date. The EU scheme does not take effect until January and thousands of companies have not yet even been given their allocations yet. But there is little doubt in the Square Mile that emissions trading could be a very profitable branch of the commodities market.


The likes of Barclays Capital and Dresdner Kleinwort Wasserstein have been building their environmental markets teams, presumably in the expectation that carbon quota prices will go up. Cantor Fitzgerald, ICAP and a number of specialist boutiques, as well as the likes of Shell and BP, are also involved.


London's International Petroleum Exchange is aiming to become the hub of global trading, on the basis of the City's experience of buying and selling emissions futures so far. It is also about to start trading in a range of new carbon derivatives. But volumes are sure to increase hugely once EU quotas become a reality, and several financial centres - not least the Chicago Climate Exchange, which has also run a carbon trading system, and the New York Mercantile Exchange - are considered just as likely to inherit the leading role.


Russia's decision to move towards ratification of Kyoto is important because the treaty needed another big country's support to become legally binding. Controversially, the US has refused to sign up to the protocol, despite being the world's largest polluter, responsible for 20 per cent of all carbon emissions.


However, the political will to combat global warming is increasingly there, not least from Tony Blair, who has described it as 'the most serious long-term threat facing the planet'. Britain plans to cut its emissions by 20 per cent by the end of this decade as its contribution to both Kyoto and additional EU efforts.


The plan imposes particularly big cuts on electricity generators and coal-fired power stations and will be difficult to implement. The CBI, naturally, is not happy, warning that the government's targets risk 'sacrificing UK jobs on the altar of green credentials'.


Rod Eddington, chief executive of British Airways, has said it is impossible for his company to cut its fuel consumption, fines or not. Business leaders also point out that no comparable obligations have been imposed on household emissions and cars, which together account for as much pollution as the industrial sector.


In other words, carbon emissions will remain unpredictable and difficult to control with any precision, a point underlined by the fact that, to the government's dismay, emissions actually rose in 2003, a consequence of economic growth being 'higher than forecast'.


Meanwhile, some environmentalists fear that tradeable permits will actually delay the day when some of the wealthier smokestack companies finally recognise the need to clean up their operations. They also predict that some will simply relocate offshore, to countries beyond the reach of EU fines.


Alternatively, it is possible that the fines will not be punitive enough. The current price of carbon futures - equivalent to €10-€15 per tonne - has been rising sharply of late, but whether that proves sufficiently expensive to force big polluters to change their behaviour remains to be seen.


After fierce lobbying, EU governments have shied away from imposing heavier fines on its industries, especially as their American competitors face no such obligations. Besides, energy and power firms can do what they always do - pass on their fines to the customers. If the EU scheme fails, it could mean even higher gas and electricity prices for us all.,,1329025,00.html

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