The role of carbon markets in preventing dangerous climate change - Environmental Audit Committee Contents

Memorandum submitted by the City of London Corporation

1.  The City Corporation prides itself in being one of the first municipal purchasers in the UK of "green energy" with all street lighting and civic buildings run on renewable energy. For some time now, the City Corporation has also voluntarily offset the carbon dioxide emissions from the Lord Mayor's Show, and the business travel of the Lord Mayor, other elected members and City of London officers. It is also, perhaps, worth noting that the City Corporation is the first UK local government authority to develop a Climate Change Adaptation Strategy and to be awarded the Carbon Trust Standard (2008).

2.  The City is a founder member of the London Climate Change Agency and, in 1999, was a founder member of the UK Emissions Trading Group (UK ETG), which played an important role in laying the foundations upon which the UK, and then EU, Emission Trading Schemes were built.

  3.  The market that is building up in emissions trading is the result of a combination of the policy requirement to reduce carbon emissions and a market opportunity. The signing of the Kyoto Protocol and the resulting EU Emissions Trading Scheme (EU ETS), have led to the development of the market in carbon allowances. London's pool of expertise in financial services has enabled it to become Europe's emissions trading "hub" in a market that has seen considerable growth in recent years and a London cluster servicing this emerging industry has already developed.

  4.  In establishing the EU ETS, policy makers have created a demand for a commodity (an allowance to emit carbon) which was previously considered free. To this end, in establishing the world's only regional trading scheme, Europe has a massive potential advantage not only in the development of new financial products, but also in the financing of developments in new technologies to combat climate change. Now the price of carbon has been set, the commercial viability of abatement projects can be more readily calculated and capital or project finance sought from the private sector.

  5.  Whilst emissions trading is currently a significant tool in the fight against climate change, it is not a panacea and is reliant both directly and indirectly on enabling legislation which will lead society to a low-carbon future. However, by harnessing the market in emissions abatement, cap and trade schemes allow specific reduction targets to be set and monitored, and the efficiency of the market will ensure that emissions reductions are met at the lowest possible cost.

  6.  Carbon trading is a broad church and currently two emissions trading markets are evolving in parallel:

    — formal markets—epitomised by the EU ETS; and

    — informal markets involving Verified Emissions Reductions (VERs), which are a key market in the US.

  7.  Although the UK Government's new Quality Assurance Scheme[34] begins to address this, VERs currently lack market infrastructure, such as registries and monitoring. This Voluntary market may, however, evolve into a more formal trading system—in which case carbon offsets, such as Clean Development Mechanism credits, may form a bridge to a wider market, and could provide a common "currency" between schemes. The development of carbon trading schemes will increase market value by an order of magnitude and is likely to spawn a plethora of new products and secondary markets

  8.  Whilst there are arguments in favour of developing a global trading mechanism, another school of thought suggests that the future success of carbon markets does not necessarily rely on a global scheme since no other commodity has one. It may be that establishing a global system could be counter productive and overly complex. Many regions are setting up their own trading schemes and it might be better to perhaps capitalise on and pull those together in some way.

  9.  Regardless of whether the future of carbon markets is in a global trading system or greater compatibility between regional systems, London (and therefore the UK) cannot afford to be complacent and cede any of its commanding lead in this field. It must capitalise on its experience in the market so far to develop new products, protect the integrity of existing markets and influence the development of new markets with the long-term aim of encouraging growth in carbon trading.

  10.  Finally, in 2006, the City of London, along with BP, Forum for the Future, Gresham College and Z/Yen Consulting, launched The London Accord, a unique collaborative research project intended to share thinking on climate change mitigation and to provide analysis of approaches to direct investment to the best opportunities for investment. A number of leading City organisations have supplied their research teams without charge with the aim of providing a shared consensus to present greater clarity and better measurement of the link between investment, financial and "carbon" returns and also a better understanding of the role of public policy in this area. A report, representing the end of the first phase, was published in December 2007 as a reference guide for investors as they consider climate change. The second phase, now underway, is widening the scope of the project to a broader range of social and environmental issues.[35] The City of London Corporation recently committed to continue to develop and support the project until 2011.

March 2009

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