It has not been a good week for those of us who reckon that carbon trading has a critical role to play in curbing greenhouse gas emissions and driving investment in clean technology - and that's putting it mildly.
First the EU was forced to shut down all its member states' registries due to a cyber attack that allegedly resulted in €28m of carbon credits vanishing into thin air (or more likely the pockets of organised criminals). Then the European Commission botched the announcement on when certain industrial credits would be banned from entering the emissions trading scheme (ETS), losing some traders serious amounts of money as the carbon price adjusted to the correct announcement.
One trader memorably described the situation as a "Mickey Mouse market", but I always thought Mickey had a certain naïve charm. This is more Elmer Fudd market – well-meaning, but utterly incompetent.
The dual scandals that hit the market last week throw up numerous technical challenges, but the biggest concern is that they undermine investor confidence and play into the developing narrative that cap-and-trade schemes do not work.
Speaking at a BusinessGreen event late last year, James Cameron, executive director and vice chairman of Climate Change Capital, was trenchant in his criticism of the proposal that credits originating from industrial gas projects be banned: "We are still under threat that the carbon market will take away value of those who have invested to date, the very people we need to find [future investment], and they are not going to turn up with the next $100m or $200m if they have lost a packet on some irrational political decision. The [sums required for low-carbon investment] cannot be met without the very people who are about to lose money from a set of poor decisions made by the European Commission and the CDM executive board."
And so it has come to pass.
There are valid concerns about HFC and N2O credits, and the manner in which projects in China and India can generate significant profits simply by destroying the gases using a low-cost process. But there is little or no evidence of projects actually breaking the rules and issuing more credits than they should, while there is next to no progress on developing an alternative means for incentivising firms to destroy these powerful greenhouse gases.
Instead, like a bull in a china shop the EU has waded in and banned these credits, retrospectively undermining the value of investments made in good faith while offering nothing in the way of an alternative solution.
Worse still, confidence in future offset schemes has been dealt a major blow. As one market insider told me, there is not a single risk management board worth its salt that will not look at the carbon market and ask tough questions about whether future investments will be hit by changes to the rules arbitrarily imposed by the European Commission.
What the last week has proven is that it is time to take the management of what is a multi-billion euro market out of the hands of well-meaning civil servants and policy wonks in Brussels and hand it to the kind of financial regulators that understand the paperwork and processes needed to run an effective market.
Financial regulators may not have covered themselves in glory in the past few years, but as a rule they know how to make the correct market-moving announcements at the correct time. They also understand that any changes to the rules of the market, particularly those with a degree of retroactivity, have to be handled carefully. They would currently be working on clear guidelines detailing the processes that need to be adhered to if a ban on future credits is to be imposed, stepping up investment in cyber security, and carrying out a detailed investigation into the embarrassments of the past seven days with a view to firing those at fault. The European Commission may be doing all these things but if it is, it is not communicating it very well.
The European carbon market remains the world's foremost carbon pricing mechanisms, and coupled with the UN's Clean Development Mechanism represents one of the only current means of transferring money from industrialised nations to clean tech projects in the developing world.
As the past week has demonstrated, it remains littered with flaws, but now is not the time to throw the baby out with the bath water and ditch one of the few progressive schemes we have for curbing greenhouse gas emissions. Instead, Brussels bureaucrats must admit they are not up to the job of managing such a complex market and urgently appoint some people who can turn the market into the success it has always promised to be on paper.
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