Beware Subprime Carbon

posted by Josh Ran

With the economy in meltdown, it’s no wonder that everyone is casting around for a fast way to make a buck. You can hardly turn around without hearing more dismal news about layoffs. Almost everyone (except maybe JPMC CEO Jamie Dimon who keeps telling everyone how much money he has) has been affected in some way, large or small by the unraveling of the financial system.

As everyone is casting around to try and sort out the mess left by investments in financial products that no one really understood and that turn out to have very little value, there is another quiet crisis brewing. Carbon Trading. Enviro’s and human rights groups like Carbon Trade Watch have been warning that carbon trading is unlikely to solve the climate crisis and is certainly going to lead to massive environmental justice abuses. But today, for the first time that I can think of, industry stepped up to say ‘whoa nelly this might just be another case of subprime investing’.

Vincent de Rivaz, the chief executive of the UK arm of the French-owned gas and electricity group, being quoted in the UK Guardian said: “We like certainty about a carbon price,” he said. “[But] the carbon price has to become simple and not become a new type of sub-prime tool which will be diverted from what is its initial purpose: to encourage real investment in real low-carbon technology.”

The article goes on to point out that the recent economic downturn has sent steelmakers and hedgefunds rushing to cash-in the carbon credits that they received for FREE under the European Trading Scheme – sending the price of carbon plummeting down. Which more or less defeats the purpose of having a price on carbon in the first place. The problems with relying exclusively on market mechanisms to deal with climate change are legion, but perhaps the least talked about is the fact that at their root, carbon credits are…essentially manufactured financial products, much like the raft of such products that got us into the current financial mess we’re in. That is not to say that there is no place at all for carbon trading in the complement of policies and approaches needed to tackle climate change, but it is a word of warning. And when that warning starts to come from none other than the very industries that have been carbon tradings most ardent supporters, it’s time to listen.