Campaigners warn carbon markets will trigger next sub-prime crisis

Carbon cap-and-trade schemes are a dangerous distraction and could trigger the next sub-prime financial crisis, according to environmental campaigners and academics.

In a report released today, Friends of The Earth says that carbon markets have been hijacked by financial organisations that are creating ever more complex products which echo the mismanagement and greed which initiated the banking and credit crisis.

According to the report, A Dangerous Obsession, the trade in carbon permits and credits, mainly based in Europe, was worth $126bn (£76bn) in 2008 and is predicted to rise to $3.1tn by 2020 if a global carbon market is established.

But rather than being based around the exchange of carbon credits between large polluters, the system has been subverted by speculators creating complex financial instruments, the report states.

"Far from proving to be an economically efficient instrument, carbon trading and offsetting have been beset by inefficiency and, in places, corruption and are set to become the next sub-prime crisis," said professor Steve Rayner, director of the Institute for Science, Innovation & Society at the University of Oxford.

The report says carbon trading is being used as a smoke screen by rich countries to avoid their commitment to help developing nations tackle climate change.

Friends of the Earth wants the government to simplify the approach to regulating carbon by developing a clear carbon tax and investing in technologies to help the UK meet its target of reducing emissions by at least 40 per cent by 2020, without offsetting.

"Pushing a world carbon market as part of a global agreement to tackle climate change risks a double whammy of financial and environmental disaster," said Friends of the Earth’s international climate campaigner and author of the report Sarah-Jane Clifton.

"Carbon trading is failing dismally at reducing emissions, yet it allows speculators to grow rich from the climate crisis and hands politicians and industry a get-out clause for polluting business as usual."

Rather than relying on markets to create a realistic price for carbon, FOE believes that government regulation is the only reliable approach.

"The credit crunch has taught us that governments, not markets, are best placed to safeguard our future. At this critical point in the fight against climate change, ministers must step in and lead the way with a new, direct approach to tackling carbon emissions to create a safe and green future for us all," said Clifton.

The report focuses on the most mature carbon trading scheme – the EU ETS scheme – which the report claims is fundamentally flawed.

"The experience of existing emissions trading schemes, notably the EU ETS, indicates that carbon trading is failing according to the criteria set by its proponents," it says.

"Against its own criteria, carbon trading is not achieving the promised emissions reductions, nor is it driving the major technological innovations that are needed to shift our economies to low-carbon paths."

Governments have argued that the price on carbon delivered by the ETS will drive investment in low-carbon technologies such as wind energy, nuclear power and carbon capture and storage systems by making them more cost-effective than coal and gas.

However, according to experts, the price of carbon will have to reach between €50 (£44) and €80 a tonne to drive the widespread adoption of low-carbon technologies.

But according to reports earlier this week, the long-term price of carbon under the ETS is set to hold at less than €40 a tonne. This could fuel further speculation that governments, including the UK, may intervene in the ETS market to drive up the price of carbon and provide better incentives to low-carbon investments.

Supporters of the EU ETS say it will become more effective when caps are tightened to the required levels.