<a href="http://www.gmagazine.com.au/blogs/leon#">The Business of Green</a>

The Business of Green

Money matters in the green world, by Leon Gettler.

The carbon tax and banks

The carbon tax and banks

Credit: sxc.hu

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Much has been said about the different industries that will lose out because of the carbon tax. We’ve heard it all before: steel, mining, manufacturing, retail… the list goes on.

But there is one sector that will clean up big time: it’s the banks and financial services.

Australian banks like Westpac, ANZ and Macquarie are looking at opportunities to cash-in on the proposed carbon tax by developing new financial products and services that capitalise on a market seen to be worth $10 billion a year.

They will create forward contracts for heavy polluters seeking to lock in a fixed carbon price, they will hedge fuel costs for airlines and currency risks for permits traded internationally, advise companies on carbon liabilities and risks and finance new low emission technology and energy efficient projects.

It’s a trend we are seeing all over the world. Reuters reports that banks like Goldman Sachs, Barclays, Citigroup, JP Morgan and Nomura are all lining up. Banks always see opportunities for profit in everything.
Accountants and lawyers will also be the big winners, according to some reports.

Research by IBIS World shows the demand for accountants will surge by 3.4 per cent in the next year because of the Government’s plans.

But a carbon market also has financial risks when banks get involved. Carbon will be the next bubble and if it’s not regulated properly and if the banks are given too much latitude, it will be one that could make the US housing market crash look like a picnic.

One reason the US market collapsed was that no one was minding the store when companies were trading exotic and little understood derivatives. Carbon credits are designed to reduce greenhouse gas emissions by selling carbon as futures or forward contracts at a certain quantity and price. Carbon credits are derivatives; bets on the future, and that’s where it becomes dangerous.

A report from environmental group Friends of The Earth says we don't yet know how to regulate this market. The report, called Subprime Carbon, says: "Little attention is being paid to how and whether new financial regulations will be adequate to govern the carbon derivatives markets, which many experts believe will eventually be bigger than the credit derivatives market. Similarly, most federal climate change bills do not provide for adequate carbon market regulations, creating a potentially huge regulatory gap."

For example, we are yet to see measures minimising potential conflicts of interest with carbon trading, conflicts that echo those perpetrated by ratings agencies that left capital markets in smoking ruins.

Impossible with carbon? How about financial engineers creating "junk" carbon contracts with a relatively high risk of not being fulfilled, similar to subprime mortgages? Or consultants offering advice on developing carbon offset projects and then, like the ratings agencies, earning fees to verify emissions from those projects? Or investment banks taking equity stakes in carbon offset specialists and then selling their services as carbon brokers and analysts?

Sure the banks are going to clean up. But there are big risks. There is no doubt that carbon trading will generate green jobs. It's just that many of those jobs won't be the kind people imagined. There will be lots of jobs for bankers, accountants, lawyers, and people working in financial services.