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What goes up must come down – Carbon trading, industrial subsidies and capital market governance

What goes up must come down – Carbon trading, industrial subsidies and capital market governance

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Published by Oscar Reyes
What Next Volume III Climate, Development and Equity, no. 61 | september 2012
Co-published by Dag Hammarskjöld Foundation and the What Next Forum
Oscar Reyes
What Next Volume III Climate, Development and Equity, no. 61 | september 2012
Co-published by Dag Hammarskjöld Foundation and the What Next Forum
Oscar Reyes

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Published by: Oscar Reyes on Nov 10, 2012
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no. 61 | september 2012
 What Next Volume IIIClimate, Development and Equit
 
 What goes up must comedown – Carbon trading,industrial subsidiesand capital marketgovernance
Oscar Reyes
When nancial ervice prodct are advertied in the UK, a govern-ment health warning provided by the Financial Service Athority(FSA) ie a reminder that ‘[t]he vale o invetment may all a wella rie’� Bt eller are oten not o catio when it come to oer-ing carbon credit, prompting the FSA to ie a actheet with thetrapline: ‘Find ot why yo hold be wary abot inveting in thecarbon credit market’ (Financial Service Athority 2011)� It draw at-tention to ncrplo alepeople who call ot o the ble, oeringcarbon credit a ‘“the new big thing” in commodity trading’, claimingthat a ‘indtrie now have to oet their emiion’ and govern-ment i ‘ocing on green developmentthi i ‘an ever growingmarket’�The rpriing thing abot the warning i not o mch that it drawattention to carbon rad (which ha been prevalent in recent year), bt that the langage choen by the radter cloely ech-oe many o the claim made by the government, binee,non-governmental organiation and academic that have pro-moted carbon trading (Deloitte, 2010; Chan, 2010)� The ideabehind the cheme i that a market i created to pt a priceon carbon, which i a way to ‘internalie’ the economic coto climate change onto company balance heet� A limiton greenhoe ga emiion grow, prred on by inter-nationally binding emiion limit, the pply o carbonhold become carcer, phing price p� The reltantcarbon price will act a an incentive or binee toinvet in cleaner technology� Mot invetment bank andcarbon market pecialit held omething akin to thi a-mption, a can be ee in Figre 1, which illtrate their orecat or the tre price o carbon�
 
186 Development Dialogue September 2012 | What Next Volume III | Climate, Development and Equity 
 
It ha not worked thi way in practice, however� The optimitic orecatin Figre 1 were made in mid to late 2009, jt month ater the carbonprice had halved (rom a peak o €31)� Since then, it ha crahed again,with permit rom the Eropean Union Emiion Trading Sytem (EUETS), which accont or over 80 per cent o the global market, allingbelow €6�50 each� Thi led a enior climate change advior to Shell oilcompany to warn o ‘a vicio downward piral’, while the CEO o German tilityE�ON, one o the larget player in the cheme, wa evenmore blnt: ‘The ETS i bt, it’ dead,’ he aid, adding that it gave noignal or low-carbon invetment (Krkowka 2012)�How cold the theorit and market practitioner have got it o wrong?In ggeting that a carbon price hold incentivie clean invetment,and that a market i the mot efcient mean to allocate that price, pro-ponent o carbon trading have ollowed a narrowly economitic viewo the climate change problem, taking little accont o the complexitieo commodity-ormation, or the reglar trmping o environmentalgoal by competition and trade policy in the allocation and rle-ettingarond carbon allowance�Thi article oer a dierent accont, arging that the collape in car-bon price i ymptomatic o deeper aw in the attempt to commodiy‘carbon’ a a oltion to climate change� The rt two ection look atthe two main type o carbon trading - ‘cap and trade’ and ‘oetting’�An otline o the perormance o the EU ETS, the larget cap andtrade market, how that the cheme ha ailed to place any meaningl
200520062008200920102012201320152016201720192020202145 €16,1 €/t30,4 €/t42 €/t33,6 €/t25,3 €/t19,2 €/t18,4 €/t15,5 €/t13,3 €/t40 €35 €30 €25 €20 €15 €10 €5 €0 €EUA spot BluenextMeanMean + standard deviationMean standard deviation
Figure 1. Trend o price orecasts orEuropean emissionallowances.(Prada, Barbéris andTignol, 2010: 35).

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