Wall Street has made money by dealing in most things. Bits of paper have been bought and sold to cover deals in shares, mortgages, currencies, oil, gold, wheat and even orange juice. About 20 years ago, traders trained their sights on an unlikely target: climate change.
Today, a carbon-trading system has evolved, mainly in Europe, where industrial giants buy and sell permits for the right to pollute. With an estimated value of $100 billion (£62 billion), it is the EU’s chief weapon against global warming.
Like any commodity, carbon credits require a secure and liquid marketplace to trade in. New York’s Green Exchange thinks it can become a key player.
“We have established ourselves as an industry leader, accounting for a significant percentage of total trading volume, and are gaining market share from our rivals,” said Tom Lewis, its chief executive.
For Lewis and his backers, it has been a long time coming. Set up in 2008 by Wall Street heavyweights, including Goldman Sachs, JP Morgan and Morgan Stanley, the Green Exchange planned to crack an industry that some experts estimate could by 2020 become one of the biggest derivatives markets in the world with a $1 trillion value.
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Its problem was that someone had beaten them to the punch. Richard Sandor, a pioneer of junk-bond trading in the 1980s, had switched his focus from financial instru- ments to the environment. In the following decade, he became the architect of the first pollution permit trading scheme (in sulphur emissions), established to stop acid rain.
In 2003, Sandor convinced a host of big names — Ford, Motorola, Al Gore’s Generation Investment Management and others — that carbon trading would become the main tool for tackling greenhouse gases. Together they set up the Climate Exchange, a trading house for buying and selling carbon credits.
By the time the Green Exchange was launched, Sandor’s venture had a virtual monopoly of EU trading. Lewis claims the Green Exchange is the world’s second-biggest carbon trading platform. However, 2 billion tonnes of carbon dioxide were traded last year, and Sandor’s firm controlled about 90% of it.
The Green Exchange has recently set up an office in London and poached several industry big-hitters to concentrate on Europe, where trading covers 12,000 companies in 30 nations. “Europe is way ahead of the rest of the world,” Lewis said.
Yet for all its ambition, the Green Exchange may have got its timing wrong again with the credentials of emissions trading undermined by several scandals.
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The European regime has been rocked by $6 billion in tax fraud schemes along with the cyber theft of $50m in carbon credits stored in the Czech Republic registry.
The revelation that generous allocations have enabled Europe’s largest industrial firms, including Arcelor Mittal and Lafarge, to amass a stockpile of 240m carbon pollution permits with a market value of about €4 billion (£3.6 billion), has fuelled criticism.
Lewis isn’t put off. “Carbon trading markets are being established in America, Canada, Japan, Korea and Australia,” he said. There are high hopes for California, where 600 firms, including cement manufacturers and oil refineries, will be required to begin reducing emissions in 2013 through carbon trading.
Lewis is confident the Green Exchange can capture a large part of the Golden State’s trading, expected to be about 400m tonnes a year — equivalent to 20% of Europe’s total. “There will be opportun- ities for us there, where appetite for environmental products is already strong and growing,” Lewis said.
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