Time to embrace carbon trading opportunity

Stuart Fraser
REDUCING carbon emissions is a long-standing objective within the European Union for obvious reasons. But, given the current economic climate, policy makers are now stressing the need for the UK to move to a low carbon economy not only to protect the environment but also to foster long-term, sustainable growth to help our country recover from the global financial crisis.

The City’s carbon market is a fundamental part of this transition, as it transmits the price signals that allow informed investment decisions to be made. Following a series of specific policy decisions in the 1990s and the subsequent establishment of the European Union Emissions Trading Scheme (EU ETS) in 2005, the EU, and in particular the UK, has been the driving force behind the establishment and evolution of a market-based approach to reducing all greenhouse gases.

And it should come as no surprise that London – the financial capital of Europe and a global centre with a reputation for embracing innovative financial products – is home to the largest emissions trading exchange in the world. With an annual global turnover of $144bn (£93.3bn; 2009 figures), the carbon trading market is now firmly established and is growing rapidly. Even during the recent financial crisis, it defied the odds and exhibited strong growth throughout 2009 with the number of units traded worldwide increasing by 80 per cent.

Understandably, given that it was originally seen as principally a compliance mechanism rather than a standard commodities exchange, there are a number of issues surrounding the infrastructure underpinning the European Emissions Trading Scheme – a lack of legal certainty as to the status of emissions units, operational risks in accessing registries and performing transfers and limited facilities for Deliver Versus Payment (DVP) settlement of emissions units – that must be resolved as it continues to grow in both size and value.

With significant changes due to be introduced in 2012, in particular the introduction of a common European auction system and a single registry, it is imperative that we get a handle on these issues sooner rather than later so that the European Carbon Market adheres to the best practice recommendations that guide other financial securities markets.

That is why the City of London Corporation has today published the Post-Trade Infrastructure for Carbon Emissions Trading report, authored by Bourse Consult. The report provides vital recommendations for future infrastructure development in order to help policy makers and industry insiders at both a domestic and European level provide certainty and stability as this emerging and rapidly growing market continues to mature.

It is only right that the City should take the lead in developing the post-trade infrastructure – ideally at an EU level, but at a domestic level if necessary – needed to support a modern, efficient and open carbon emissions market in the UK, in Europe and across the world. In so doing, we will help the UK financial services industry prove its worth not only as a generator of revenue but as a force for good within our wider society.

Stuart Fraser is the policy chairman at the City of London Corporation.