Success that gives hope for City’s future

Anthony Hilton
7 Dec 2009

The long-anticipated Copenhagen climate change conference, which got under way in the Danish capital today, has already been written off by some activists as a failure even before the opening speeches, and in spite of the major shift in the US position as illustrated by the appearance, if not active participation, of President Obama.

Those who were hoping for some global deal in which the entire world would commit to binding enforceable targets to cut emissions are likely to be disappointed, but then that is true of most global conferences because there are simply too many interests to be reconciled to produce anything that is at once meaningful and binding.

It does mean though that, with 20,000 people attending the conference — 95% of them from pressure groups, NGOs and activist organisations of various hues — the air will be thick with recriminations about lost opportunities, political failure and time running out. In the face of such a barrage, it will be hard for the positive achievements to get noticed.

That is a pity because there is much to be positive about. The failure to land the biggest prizes should not blind people to a vast number of lesser objectives that have been achieved. If the low-profile bilateral deals and commitments were aggregated into a scorecard for the conference, it would bring home to people just how much progress has been made.

These will make a real difference long after the delegates have returned home, and that may well turn out to be the real message of this gathering. If Kyoto woke the world up to the need to think about the threat of carbon emissions, Copenhagen will show that there is now no doubt about the direction of travel, despite some inevitable foot-dragging.

Nor should we be too hard on the politicians. After, all there are still some vociferous climate change sceptics who see no point in changing at all, and there are activists who want everything to move much faster. In the middle are the politicians who juggle the conflicting pressures by publicly accepting the need for action while muttering under their breath “not yet”.

Not that those on the inside need Copenhagen to confirm the direction of travel — it is already evident in the progress of ECX, the London market that is now the world leader in the trading of carbon emission permits. This is a result of the EU's embrace of the cap and trade approach to emissions control under which key polluting industries were allocated permits to emit.

These are initially quite loose but gradually tighten as the allowable ceiling for emissions comes down — at which point industries have to pay to buy more permits, thereby giving them a financial incentive to curb their emissions. No one should underestimate the cumulative impact of this cap — it is designed to deliver by 2020 a level of emissions in the European Union that is at least 20 % and probably 30% lower than the levels of 1990.

The tightness of the squeeze is currently less than anticipated because the recession means emissions by industry are lower than expected when the quotas and caps were first calculated, and this is reflected in a price of carbon down at around €13 compared with a peak above €30 a year or so back.

This has prompted some critics to say the scheme is not working, because it is generally believed that a price of €30 is needed before heavy polluters will have a serious financial incentive to change their industrial processes.

But this rather fails to understand the nature of the scheme because even at €13, there is still an incentive for emitters, where change is less costly, to pick that low-hanging fruit.

As the cap tightens each year, the price is expected to rise and, of course, firms will soon have to buy rather than be allocated their allowances, which will serve to concentrate their minds even more. The EU net will also be widened at the same time to bring in aluminium and airlines in 2012 and shipping in 2013. One should also add that all this is happening irrespective of Copenhagen.

This growing activity is already delivering a step change in volumes on ECX. The market, which was only opened in 2005, will this year trade five billion tons of carbon, which is getting on for double the 2.8 billion traded last year. At the same time, the off-exchange activity that was prevalent before Lehman's collapse is now much reduced, so the exchange is very much the centre of carbon trading with a claimed 95% of the world's business.

But even this is only the beginning. By 2025, it is anticipated that the global market in carbon futures will be bigger than today's market in oil. That is the kind of creativity and innovation which gives one reason to believe that, despite the current turmoil, the City will continue to be the world's leading financial centre.