Carbon trading could be worth twice that of oil in next decade

Market could be worth $3tn a year but enthusiasm to place it at heart of Copenhagen is matched by growing criticism of concept
Terry Macalister
guardian.co.uk, Sunday 29 November 2009 21.30 GMT
The carbon market could become double the size of the vast oil market, according to the new breed of City players who trade greenhouse gas emissions through the EU's emissions trading scheme.
The ETS market may see $3tn (£1.8tn) worth of transactions a year in the next decade or two, according to Andrew Ager, head of emissions trading at Bache Commodities in London, with it even being used as a hedge against falling equities or rising inflation. "It is still a relatively new industry with annual trades of around €300bn every year. But this could grow to around $3tn compared to the $1.5tn market there is for oil," says Ager, who used to be a foreign currencies trader.
The speed of that growth will depend on whether the Copenhagen summit gives a go-ahead for a low-carbon economy, but Ager says whatever happens schemes such as the ETS will expand around the globe.
Last week Australia gave its strongest sign yet that it would establish its own trading market, while the US is moving towards a similar scheme in a bid to find market-based ways to accelerate the transition to a lower carbon economy.
Many political leaders, especially in industrialised countries, are enthusiastic: carbon markets hold the promise of cost-efficient emission cuts without the need for taxpayer funding. But their enthusiasm to place carbon markets at the heart of the Copenhagen treaty is matched by growing criticism of the concept, and not just from environmentalists opposed to free market solutions.
Peter Voser, Shell's chief executive, has called on governments to introduce a carbon tax or a minimum price for CO² because – as he told the Guardian – the ETS was failing to deliver sufficient incentives to kickstart expensive technologies such as carbon capture and storage (CCS).
John Browne, a former boss of BP and an early ETS promoter, has also expressed reservations about such schemes, saying it was "wrong" to place all your faith in them. Vincent de Rivaz, chief executive of EDF Energy, warned of the dangers of a "sub-prime" crisis inside the ETS if complex financial instruments were created by market participants.
The key problem seems to be that ETS carbon prices have remained resolutely low, thwarting low-carbon, high-cost investment. Carbon is currently trading at around $13 a tonne but many believe it needs to be $30, if not $50, to deliver a decisive boost for clean technologies such as wind, solar, CCS and nuclear power.
The criticisms of environmentalists such as James Lovelock and Friends of the Earth (FoE) are far more fundamental. The basic charge is that the market has put millions of pounds into the pockets of some without making any real impact on carbon emissions.
They accuse governments of being too lenient in the way they drew up the ETS: a cap that was far too loose, too many free permits, too few industries covered and poor monitoring of offset schemes that shift emissions to the developing world. If the carbon price is to rise in the next ETS phase, starting in 2013, much tighter rules will be needed.
Henrik Hasselknippe, senior analyst at consultancy Point Carbon, argues the problems have been overplayed and the market – while not operating perfectly – has nonetheless come along way from a standing start.
"Carbon prices have fallen due to the recession," said Hasselknippe, adding that he was "convinced" that CDMs – clean development mechanism credits created under the Kyoto protocol – have led to real carbon reductions. However, some reports claim that a third to two-thirds of CDMs do not reduce emissions.
Alexandria Galin, a policy manager for the Carbon Markets and Investors Association, dismisses suggestions that the market had been taken over by speculators, as claimed by FoE. "Financial institutions participate in the market largely on behalf of businesses that do not have the capacity or expertise to do it themselves. Furthermore there are no 'complex' instruments creating 'shadow finance'," she said.
Agers agrees, saying his company largely provides advice or trading on behalf of power companies and others who need to hedge their legitimate carbon risks.
He admitted that he is in many ways like any other City trader with a decent salary, nice flat and sports car to prove it. But working in the carbon field has rubbed off a little on his lifestyle: he claims to have energy-efficient lightbulbs in his home and to offset the petrol he uses driving his car to watch West Ham football team on a Saturday.
The arguments
Carbon market
For
• Guarantees specific carbon cut by setting overall cap
• Delivers maximum cuts in carbon emissions at minimum cost
• No taxpayer funding
Against
• Volatile or low price of permits deters investment
• Prone to political interference, complex and provides no incentive for individuals to act
Carbon taxes
For
• Clear, simple, covers everyone
• Relatively low implementation costs
Against
• Hits motoring and flying directly
• Cannot deliver specific emissions cut – depends on consumption levels
Regulation
For
• Cannot be avoided by finding loopholes
• Can drive big changes where markets cannot, such as energy efficiency
Against
• Businesses rail against red tape
• Expensive to implement