Carbon is the next gold


Consultants and financiers scramble to stake their claim in the trillion-dollar carbon market


By Victoria Schlesinger


Illustration by Christian Northeast

There’s a worry, however, that companies won’t invest in reductions even if they receive the allowances for free, but rather will add the value of allowances to their business costs. As a result, product prices would go up, and the profit could be passed on to shareholders. As Busch from UCS, which supports an allowance auction, explained, “A scalper is selling Super Bowl tickets. Would you expect him to sell the tickets for less if he got them for free?”

The concern isn’t trivial, as evidenced in the European Union. There, a carbon market established in 2005 is helping countries meet their commitments under the Kyoto Protocol—the international climate change treaty the US didn’t ratify. In the first experimental phase of the EU carbon market, called the European Trading System (ETS), allowances were given to emitters for free. Nonetheless, some utility companies raised the price of electricity as if they had purchased the allowances. As a result, power generators pocketed around 1 billion euros in 2005. To correct the problem, the ETS is moving to a hybrid model in which some allowances are given for free and others auctioned. The aim is to transition all industries to 100 percent auctioning by 2020. “The right approach is to look at the affected industries and to make an assessment as to how they function and how they can pass price along,” said David Hone, group climate change advisor for Royal Dutch Shell, the world’s third-largest corporation.

After three years of experimenting, EU companies are like carbon market veterans when compared to their American counterparts. Hone attended Carbon Forum America, and he thought the tension among participants was due to a lack of experience with emissions caps. “A lot of people in companies don’t imagine, for instance, that the carbon price can pass through in the services they offer; therefore they see the possibility of auctioning as a threat to their profitability,” he said. “We’ve experienced the same tension in Shell, but we now have a lot more economic input into our assessment of this than we did originally.”

To gain similar insight, US companies are contracting experts to advise them, and therein lies the opportunity for financial intermediaries, such as brokers and banks. Financiers are expected to handle half to two-thirds of the trades in the $1 trillion carbon market, which might explain why they dominated Carbon Forum America and why Struhs was peeved that industry was left off the registration list. In his presentation, Struhs described the plight of a fictional company deliberating over whether to spend money to reduce their emissions or buy carbon allowances. “They recognize that NatSource charges these exorbitant fees,” Struhs said, poking fun at the financial services company sharing the stage with him. “But they also recognize that there will be certain circumstances where NatSource can provide them with the low-cost alternative.”  Reclining in a leather booth at the Butterfly Lounge, Brian Prusnek, the 30-year-old vice president of policy for Climate Change Capital, explained the relationship between emitters and financial experts more bluntly. “Companies that are going to be regulated are going to have to spend money to comply with regulation. Every penny they spend is possibly a penny or half penny for us.”

Financiers will rarely earn that much, but they do stand to gain business from a cap-and-trade system.

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Comments

Damn straight - James Cameron rocks!

Is it supposed tobe COOL to buy the right to pollute? I'm new here, but have heard of this idea before and always assumed it was some sort of a joke, like the ancient idea of buying indulgences so one could sin. Does this actually make sense to anyone besides maybe someone like the former managers of a company called Enron which brought rolling black outs to California?

@Siver Bear - dude you spent too much time as an altar boy as a grom. By creating a market for co2 emissions, coupled with legally binding targets, countries and companies have start paying the true price for their activities. As a result investment, at scale, will be channeled to reduce GHG emissions and generate cleaner energy. Companies that adapt will still make a profit and only now in conjunctiuon with the environment. Wealth can still be created, only now it's wealth worth having.

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