While we are all very interested in carbon targets, particularly in the final run-in to Copenhagen, we need to be aware of what would really happen whatever targets are set.
The preferred policy leans very strongly to some form of carbon trading. But what does this imply? Here is my presentation on this from the last meeting.
Market Poison and the Problem with Offsetting
Land is an example of a necessarily restricted commodity. Only if landholders do not constantly exchange their lands for other lands in obedience to price movements or “efficiency” considerations, or constantly exchange the peoples that belong to the land for others, or for none, can food supplies be ensured, along with the preservation of soils and forests. Land cannot be “consumed” but has to be productively reused and renewed. Every society learns to limit how far land can be exchanged or accumulated, what it can be used for and where (for example, through zoning laws, laws prohibiting conversion of agricultural land, green belt provisions and various taboos), and how it is to be used and by whom.
Commodifying Security and Risk. The Insurance and Gambling industries are built on the commodification of risk. But the risks are well-defined and calculable.
GM Food.. but also EU food standardisation.
Derivatives
Named because they are "derived from an Asset or product"
Essentially an extension of commodification of insurance and risk into the area of trading.
So, futures/forwards seek to provide insurance or "hedge" a transaction by creating a guaranteed contract for the future. This allows traders to manage risk in the same way that individuals manage risk with insurance policies.
Options. The interesting thing about an option is that unlike a future there is no obligation. It is analogous to gambling where you either win or lose your stake. Although it may initially appear like a hedge, it is highly leveraged and creates uncertainty and therefore risk. So an option does not mitigate risk in trading but rather creates new risk. In addition, due to it's leverage and lack of obligation an option is a vehicle for speculation more than insurance.
A Swap is an agreement to exchange assets (typically currencies) at some specified rate. However, the trigger is often more complex than a defined date.
..and a swaption is an Option on a Swap. Both swaps (due to the indeterminate triggering conditions) and swaptions have the capacity to introduce and not mitigate risk.
Milton Friedman paid to produce a paper that was then used as a basis to lobby for a currency futures market.
Repeal of Glass-Steagall act in 99 that allowed commercial banks to use their deposits for global gambling.
Continuing Scale Complexity - identifying risks on derivatives that can be liquified and turned into Assets....
Clearly with currency only a tiny number of credit default swaps were undertaken to match an underlying position in bonds, most were speculative.
Financial Models
Black-Scholes option pricing equation supposedly replaced "gambling" with "efficient pricing". Imagine if you could place a bet when you knew the true odds.. that a horse had a 1 in 3 chance of winning but you could place a bet at 1 in 4, after 15 rounds of bets, re-investing winnings you would multiply your original stake by a factor of four, guaranteed! After 30 rounds, sixteen.
But while models are able to accurately simulate behaviour - plane simulations and architectural models - the financial models are used to determine the actions of the actors in the model itself. This means that the model has to be able to model itself within the system. This is a logical impossibility as demonstrated by Goedel's incompleteness theorem for anyone interested.
Models detach decision makers from risk. "Give a pilot a faulty altimeter and he will crash the plane, give him nothing and he will look out of the window". ... and we can guarantee that financial models are faulty!
Carbon Trading
[There is] an attempt to develop a commodity as a neoliberal solution to global warming. Today, the project of building a single, liquid global carbon market worth many trillions of dollars – backed by the UN, national governments, economists, environmentalists and many in the business sector – is the main official approach to the climate crisis worldwide.
Some of the same people who developed the financial derivatives market are behind the carbon markets which began as "pollution trading".
This programme of commodity formation has a number of immediate political and climatic blowbacks. First, it at once disembeds the climate debate from the challenge of initiating a new historical pathway to overcome current dependence on fossil fuels. Instead, it conceptualises action on climate change in terms of numerical greenhouse gas emissions reduction targets.
Translation: It "depoliticises" climate action
The record of the EU ETS reveals problems with overreliance on price incentives. In the scheme’s first phase, the largest industrial greenhouse gas emitters in Europe were granted more rights to emit greenhouse gases than they needed to cover their current emissions. The result was the carbon market’s first big price crash in April 2007.
Renewable energy gains no benefits from the EU ETS; one utility that does happen to have undertaken a (highly unusual) long-term programme of disinvestment in fossil fuel generation explicitly states that the EU ETS has not affected its decision.
According to Citigroup research, the main winners from the EU ETS have been, in order, hedge funds and energy traders; coal and nuclear generators; and all generation-based utilities, with consumers the biggest losers. Profits have increased, but no policy goals have been achieved.
The project of finding a “cost-effective way of addressing global warming” through carbon trading becomes incoherent insofar as creating the market framework necessary to make sense of the notion of costeffectiveness entails losing touch with what is supposedly being costed.
It is estimated that in five European countries, windfall profits for power generators from cap and trade will reach US$112 billion by 2012. Much of this free money is being ploughed back into long-term fossil fuel investments, further locking in global warming.
[The carbon market] is being heralded as the “world’s biggest commodity market” and prospectively “the world’s biggest market overall,” with “volumes comparable to credit derivatives inside of a decade.”
