The annual Lord Mayor’s City Debate took place in London’s Mansion House on Monday evening, with FT Alphaville in attendance. (Many thanks to the Chicago Mercantile Exchange for the invitation.)
The motion put forward to financiers: financial markets are doing nothing to help stop climate change.
Eric Bettelheim, carbon consultant and resident partner of Rogers & Wells, and John Vidal, the Guardian’s environment editor, argued in favour of the motion, while James Cameron, the vice chair of Climate Change Capital, and Lord Teverson, Liberal Democrat spokesman for energy and climate change, argued against. The FT’s own Gillian Tett moderated.
And while the nays managed to swing the vote in the end — the questions from the floor were what really focused debate on the night.
Among them, a comment from Icap Energy’s Paul Newman, who asked whether some type of ‘central bank’ authority was needed to control the supply of government-issued carbon credits to make the scheme work.
The background here is that the first phase of the European Trading Scheme was deemed a failure after carbon emission prices fell to zero on too much government-manufactured supply. It seems there’s now a big risk a similar scenario could hit the scheme’s second phase.
This time ’round it wouldn’t be down to overly generous national allocation plans, but rather the recession cutting into European industrial production and carbon-credit demand.
According to Newman, though, a carbon central-bank type authority, or Carbon Opec, could mitigate such effects.
Essentially the authority would be mandated with the task of regulating supply in exigent circumstances — preventing collapse by taking credits out when the market was unexpectedly oversupplied and soothing prices with issuance of new credits when prices were spiking higher.
Not that such ideas haven’t been touted before.
Alessandro Vitelli, director of strategy and intelligence at IDEACarbon, a carbon consultancy, drew our attention to an article penned by the group back in May 2009.
In it they argued:
The carbon market, unlike other commodities, is artificially created. Policy makers have created the demand for allowances and offsets and at the same time have matched that with supplies of EUAs and CERs or Emissions Reduction Units (ERUs). The mismatch between these two dictates the price, which in turn trickles down and triggers domestic abatement actions or purchases of offset permits to achieve emission targets.
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In the case of the EU ETS we believe that the creation of a central Carbon Bank, with a clear mandate, might resolve many of the issues which have cropped up in Phase II of the EU ETS and at the same time give the trading market greater confidence. The Carbon Bank, similar to any Central Bank, will have one overarching mandate. Take the example of the Bank of England (BoE) which has as its primary task the responsibility of keeping UK inflation within government-set targets by tweaking interest rates. It is also responsible (hand-in-glove with the government) for monetary and financial stability with the aim of ensuring economic growth. It has a monopoly on the issuance of banknotes.In the climate change sphere, a European Carbon Bank would be given the headline task of ensuring that the EU achieves its 2020 target of cutting emissions by 20% from 1990 levels , or by 30% if an international agreement is reached in Copenhagen at the end of this year.
To achieve this, the Bank would have the power to auction a specified number of EUAs. It would be given an allocation (publicly known) at the start of a compliance period, and it can decide when and how much of this to use. If prices are deemed to be too low, it can hold back volumes available for auctions or raise them if the market gets over-heated, in a manner which would be “telegraphed” to the market similar to government debt issuances.
The auctions could be held every month or quarter and the Bank would let the market know well in advance (one to three months) of the details of each auction. In this way the market would adjust its view of fundamentals and take necessary trading actions. The funds raised from the auctions could be used for the running of the Bank and its associated duties as well as earmarking for selected climate-specific purposes. Alternatively, funds could simply be returned to member nations.
So that’s essentially some sort of EUA redemption/creation process with primary dealers market-making in the middle.
Seems to make perfect sense, right?
Except, as speakers were quick to point out, the problem doesn’t so much lie with the technicalities of how a carbon bank might work, but rather the political will to make it happen. In short, it is feared too many countries would see it as giving up authority to yet another European multi-national body with little or no experience in dealing with the matter at hand.
Related links:
Carbon cop-out – FT Alphaville
Carbon indulgences – FT Alphaville
Uncool carbon markets – FT Energy Source
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