If it is not structured properly, global warming legislation could lead to the creation of an enormous, poorly regulated derivatives market with failures mirroring those that led to the current financial crisis, according to a new report.
The report, "Subprime Carbon? Re-thinking the World’s Largest New Derivatives Market," released by Friends of the Earth U.S., finds that existing financial regulations, as well as those in major cap-and-trade bills, are inadequate to govern carbon trading, creating a potentially huge regulatory gap.
“Global warming has reached a crisis point, and it’s imperative that Congress move quickly to put solutions in place, but it’s also important to be careful and do this the right way from the start,” said Michelle Chan, a senior policy analyst at Friends of the Earth and the author of the report. “If we aren’t careful, we could end up creating a massive, poorly regulated derivatives market that not only poses risks to the broader financial markets, but also undermines efforts to save the climate.”
The report outlines how lessons from the current financial crisis apply to carbon markets, which could become the largest derivatives markets in the world. In particular, it raises concerns about “subprime carbon,” risky carbon credits based on uncompleted offset projects (projects designed to sequester or reduce greenhouse gases).
Subprime carbon credits may ultimately fail to reduce greenhouse gases and, like subprime mortgages, could collapse in value, yet they are already being securitized and resold in secondary markets. The report recommends that lawmakers include carbon trading in current debates about financial reform, and warns against hastily creating carbon markets without proper oversight.
“Fortunately, there are ways to minimize the environmental and financial risks of carbon trading, including prohibiting offsets and creating a stable price path for carbon,” Chan said. “We should also avoid putting all our eggs in one basket. Although many lawmakers are talking about carbon trading as if it’s the only way to reduce greenhouse gases, no single approach will solve climate change—a diverse set of complementary strategies is needed.”
The full report can be viewed at the link below.
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