Metropolis of London needs to scrub up the world

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Britain believes it has picked the ideal moment to advocate financial innovation that could help save the world. As part of Prime Minister Boris Johnson’s blueprint for tackling the climate emergency, the UK is exploring the creation of a London-based international market for carbon offsets, carbon credits and derivatives related to mitigation investments.

The plan sounds noble. Should it really take off, you might even be able to reduce your personal emissions by buying compensation for doing things that are harmful to the environment, such as caring for the environment. For example, fill up your car with gasoline or buy a cup of coffee. But it would be premature to bet on this utopian-sounding result.

After many previous efforts to boost carbon trading failed due to a lack of clear government policy, this could be one of the better chances to get a market off the ground. Companies struggling to reduce their own carbon footprint could certainly use a deep, liquid pool of loans to buy to meet the demands of increasingly greener investors. Xi Jinping’s announcement that China will achieve carbon neutrality by 2060, and President-elect Joe Biden’s call for a net-zero economy by 2050, could jolt any embryonic market.

Former Governor of the Bank of England, Mark Carney, now a United Nations climate officer, believes a global carbon offsetting market should be valued at “ten or one hundred billion” dollars, many times the current US $ 300 million -Dollar. And Johnson plays a central role for the City of London as a trading center to cushion the loss of other financial deals for the European Union after Brexit.

There is competition for London, not least from its sparring partners in Brussels. The European Commission is considering revising its own emissions trading system, which is already the largest carbon market. Futures contracts on these emission allowances are traded on the ICE exchange, and the price there has risen sharply after a sharp correction during the initial coronavirus lockdowns.

However, London has a history of top-tier funding, a deep talent pool and a strong lead in the trillion-dollar swap market. It’s a logical place to start trading in carbon credits, and the derivative-like contracts companies seek to tailor to their individual needs have been the global carbon credits market.

Unfortunately, it is far from certain that it will be.

First of all, the global price of carbon emissions must be much higher to get a proper international market going. The current average price of $ 3 per tonne reflects the abundance of credit from different countries and the exemptions for polluters. It should probably go up to $ 75 to $ 100.

Even with a stronger reference price, there are significant practical barriers to a reliable and effective carbon market. There are still no common international principles and standards for credit, and the market lacks transparency. Take a reforestation project, for example. Investors would need assurances that the trees will actually be planted and that they will not be double-counted to secure other loans.

Bill Winters, the head of Standard Chartered PLC, who estimates the market’s scaling, believes it may be manipulated in the same way as interest rate benchmarks. An independent agency could try to enforce standards. However, reviewing the supply of credit and cross-border shopping would be a big undertaking. Twenty countries – led by Indonesia, Brazil and the Democratic Republic of the Congo – make up most of the potential loan supply, while much of the demand comes from Europe and the US

Fraud and money laundering would be an issue. The temptation for traders to get rich from a fictional forest might be too great to overcome.

If Britain leaves the EU, it will have to be decided whether to merge with the existing European standards or formulate a broader, more flexible global alternative that can build a critical mass. Maybe London and Europe could try to coexist. At the moment, however, a global emission allowance system is just a concept, while the world’s leaders decide whether to work together.

Elisa Martinuzzi is a Bloomberg Opinion columnist specializing in finance. Marcus Ashworth is a columnist for the Bloomberg Opinion, which covers European markets.

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