in European Union, Germany, UK

Worst fortnight ever for carbon markets?

During the first week of the negotiations at COP18 in Doha, Martin Hession, a vice-chair of the Clean Development Mechanism (CDM), said that the main issue is, “[W]hat are the targets going to be in the future and what instruments are going to deliver on those targets.”

Hession’s wrong. The main issue is how we’re going to start leaving fossil fuels underground. But he’s right when he says that “The CDM is in a difficult situation at the moment.” Hession’s interest in is bailing out the carbon markets: “The problem is that there is no demand so the biggest challenge is to address how we can get that.”

Governments failed to negotiate new emissions reduction targets in Doha and carbon markets were left high and dry. The past two weeks may be the worst ever for carbon markets. Ken Newcombe helped create carbon markets through his work at the World Bank. He left the World Bank to make his fortune as a carbon trader, working at Climate Change Capital and Goldman Sachs before setting up his own firm, C-Quest Capital. He is now watching traders leave the carbon markets. He recently spoke to RenewEconomy:

“With very few exceptions, investment banks, commercial banks, commodity based hedge funds and specialised carbon funds with exposure to the CDM have either closed shop and laid off their deal teams or appointed caretakers to manage portfolios of assets with residual value.

“Those business still active in the CDM are the ‘walking dead’ of the carbon market. They are living on deals done at higher prices years back and are living on borrowed time, if not borrowed money.”

Here are some of the highlights of the worst fortnight ever for carbon markets:

  • 4 December 2012: City of London Police arrested 11 people after an investigation into “fraudulent” investment firms selling carbon credits: Hudson Forbes, CT Carbon and Burlington Energy Markets were the companies involved. Detective Inspector Matthew Bradford, of City of London Police, said,

    “Carbon credits are the latest in a growing list of products marketed by fraudsters as a sure fire way to make maximum profits with minimal risks. They exploit people’s misguided belief that environmental investments cannot fail, and then use teams of cold callers to seal the deals, often bullying victims into handing over their savings against their better judgement.

    “Carbon credits are designed for companies and small businesses to offset their carbon emissions, and definitely not for the individual investor looking to buy and sell.”

  • 5 December 2012: The carbon trading exchange BlueNext closed. BlueNext is owned by NYSE Euronext and Groupe Caisse des Dépôts, a state-owned French investment vehicle. In April 2012, NYSE Euronext closed its Asian and US carbon operations. Duncan Niederauer, NYSE Euronext chief executive, said,

    “This is not a verdict on the environmental space — simply a recognition that the development of this market will take longer than we or our shareholders are willing to wait”

  • 8 December 2012: While Doha agreed to a second Kyoto period, running until 2020, the countries bound by the second period account for only 15% of global emissions. Meanwhile, negotiators in Doha allowed around 7 billion surplus Assigned Amount Units (AAUs), so-called “hot air”, from the first commitment period to be carried over to the second period. Australia, the EU, Japan, Liechtenstein, Monaco, Norway and Switzerland announced they would not buy the AAUs. Negotiators failed to agree reform measures for the Clean Development Mechanism that may have increased demand for and reduced supply of carbon credits.
  • 11 December 2012: First Climate, a German carbon asset management company, closed its sales and trading department. The company blamed low carbon prices and “a lack of ambitious international carbon reduction goals”.
  • 12 December 2012: 500 police officers raided Deutsche Bank, arresting five staff suspected of being linked to a value added tax (VAT) scam involving the trading of carbon permits. The police are investigating a further 20 bank employees on suspicion of serious tax evasion, money laundering and attempted obstruction of justice. In 2011, a German court jailed six men involved in a €300 million fraud selling carbon permits through Deutsche Bank.

    In 2009 and 2010, the EU carbon markets were hit by “carousel fraud”, in which traders bought emissions permits in one country without paying VAT, then sold the permits in another country with VAT and pocketed the difference. Europol, the European Police Agency, estimates that VAT fraud cost EU states about €5 billion in lost taxes.

  • 12 December 2012: The price of U.N. offsets crashed to a record low of 31 cents. The price of Certified Emissions Reductions was dragged down by the price of Emission Reduction Units (ERUs) which reached their own record low of 15 cents.

PHOTO credit: Friends of the Earth International.

Leave a Reply