Thursday, May 21, 2009

Bill on climate change offers hope to Wall St.

From The
As Washington begins to clamp down on the runaway financial markets that threw the world economy into crisis, lawmakers are handing a new opportunity to Wall Street on an unlikely issue: climate change.

At the heart of the 900-plus-page climate change bill that the White House and House Democrats have rallied around is a massive new dose of confidence in markets. Some critics say the bill may create a “carbon bubble” that could leave unsuspecting investors holding worthless assets and ultimately undermine efforts to reduce greenhouse gas emissions....

...Among the financial firms lobbying on the issue this year are: Zurich Financial, Chicago Mercantile Exchange Corp., JPMorgan Chase & Co., the Reinsurance Association of America, Swiss Re, Deutsche Bank, UBS America and the International Swaps and Derivatives Association.

Estimates of the potential market size vary widely. New Carbon Finance, a private consulting firm, puts the market for derivatives, futures contracts and anything related to emissions allowances at $860 billion by 2020. The CFTC said the carbon market could reach $2 trillion five years after it starts.

“It wouldn’t be as large as some of the financial markets — Treasury bills — but it would be larger than any physical commodity market,” said CFTC Commissioner Bart Chilton, head of the agency’s energy and environmental markets advisory committee.

Kevin Book of the firm ClearView Energy Partners agreed that the carbon market would become the largest commodity market in the world, creating revenue streams for financial firms through the purchase and sale of allowances, transaction fees and market research services....

...Wall Street’s interest in the bill makes some in the environmental community nervous that speculators will create a carbon bubble that creates havoc in the market and undermines its ultimate effectiveness in cutting emissions.

Michelle Chan, green investment program manager for Friends of the Earth, an environmental advocacy group, said lawmakers need to do more to ensure adequate oversight of this huge new market because it presents unique challenges that may not be covered under the broader financial services regulatory reform effort Congress and the administration are simultaneously pursuing.

“The most important step policymakers could take to preserve the financial and environmental integrity of carbon markets would be to design the market itself to be fundamentally smaller, simpler and more stable,” Chan said.

“General derivatives regulations are designed to curb the most excessive behaviors in fairly liberalized and volatile markets; we can structure carbon markets differently,” Chan said.

One potential problem area concerns the trading of offsets to help industries meet their emissions targets. For example, a utility or a bank could invest in the development of a forest plantation in South America, which would count as an emissions offset because trees suck carbon dioxide out of the air, and then trade that credit on the market.

The bill requires an oversight body to verify that offsets provide real emissions savings. Lawmakers are working to add government regulations to the bill to avoid creating unregulated derivative markets such as the ones that exacerbated the financial crisis. But Chan said the legislation doesn’t do enough to assure investors that the offsets they buy will hold value.

“The problem is you can enter into formal contracts that are sold and resold before the greenhouse gas reductions have been verified,” Chan said....MORE