Capitalising on climate change

From Master of the Universe to will o’ the wisp: the demise of the Lehman Brothers’ investment bank is a case study in the vacuity of modern capitalism. Quite apart from speculating in dubious property investments, another big idea the bank had was to trade in thin air. The 2007 Lehman report, The Business of Climate Change: Challenges and Opportunities, argued that the bank could play a major role in the fight against climate change – and earn some money doing it. Lehmans hoped to become a ‘prime brokerage for emissions permits’ (1). But how do you make money out of climate change?

The 1997 United Nations’ Kyoto deal on climate change laid the legal basis for carbon trading. It called for limits on CO2 emissions on the grounds that they were damaging the planet. Under the two schemes that followed on from Kyoto – the European Union Allocation (EUA) and the UN’s Clean Development Mechanism – legal titles to emit a given amount of CO2 are distributed to industry. These titles are transferable, creating a market in carbon trading rights.

These titles to emit carbon are not real goods, but monopoly rights created by laws. Once they are traded, though, they act just like commodities (2). Because they are limited in number, and needed to take part in a lot of industry, they are susceptible to big price swings, and are therefore ripe for speculation. Financial markets being what they are, the speculative potential of carbon trading could hardly be ignored. Here was another opportunity to make money for doing nothing. In fact, here was an opportunity to make money by stopping things from being made. What red blooded capitalist could resist?

The EUA was overpriced at its initial offering, at €30 a tonne. Within a year, the value of the market in EUAs doubled in value to €205billion. Unfortunately, 170 million credits too many were issued. Individual companies, particularly energy companies, soon noticed that they had millions of tonnes of EUAs they did not need, and so they sold their unused carbon licenses on, making huge profits. A 2005 report by IPA Energy Consulting found that the six UK electricity generators stood to earn some £800million in each of the three years of the scheme, by selling their spare EUAs.

A separate report by Open Europe, in July 2006, found that UK oil companies were also poised to make a lot of free money: £10.2million for Esso; £17.9million for BP; and £20.7million for Shell. Beyond Petroleum indeed – why bother refining petroleum when the EU will give you millions in carbon trading titles? It was so much easier for energy companies to by-pass electricity generation, and trade in fictitious legal titles.

So who was paying for the legal titles? Universities and hospitals in the UK and under-allocated EUAs were amongst the buyers. The University of Manchester alone shelled out £92,500 for its carbon rights (3). Of course, once the big EUA traders had sold them on, the prices collapsed, leaving public utilities holding overvalued EUAs. Hewlett Johnson, the ‘red’ dean of Canterbury, used to say that if the capitalists could put a price tag on the air we breathe they would sell it back to us. Little did he know that 50 years later hospitals and colleges would be paying oil and energy companies for a share of the atmosphere.

The emergence of a market in carbon emission rights also creates a new role for a broker for those rights. The World Bank has its eyes on the prize, having proposed to broker rights between the developed and developing world. The trading could earn the Bank $100million a year (4). US companies are gearing up for the expected adoption of carbon trading (a voluntary climate change market in Chicago has already seen its titles increase in value five times). Global financial services firm Morgan Stanley is investing $3billion to trade carbon, and a host of new companies, like EcoSecurities and Trading Emissions, are setting up shop in New York (5). The Oxford-based EcoSecurities expected to trade £38million and to make £6million in 2007, and to trade £96million and make £52million in 2008 (6). If the roller coaster of EUA prices is anything to go by, brokers’ ambitions are realistic.

It is important to remember that what Carbon Trading generates income from are limits on output – and carbon emissions are a cipher for industrial output generally, since most industry involves carbon production. For individual businesses it might make little sense to limit output, but for larger businesses it can be advantageous for the bar of entry to a given sector to be raised higher as it restricts competition. And in creating monopoly conditions, businesses can pass on the additional costs to their customers. The desire to raise the bar of entry is behind the European Union’s backing of, and China’s opposition to, the Kyoto summit agreement. Carbon limits favour mature industrial nations against their developing rivals.

Lehman Brothers, though, were amateurs in the Green Capitalism that has seen other environmentalist campaigners extort fortunes from public fears. In 2007, £17million was spent on advertisements that used the words ‘carbon’, ‘CO2’, ‘emissions’, ‘recycle’ or ‘environmental’ compared to just £448,000 in 2003 (7). It seems Lehman Brothers were just too 1980s and not Noughties enough; they were behind the curve when those more ruthless environmentalists were making a killing selling hot air.

James Heartfield’s Green Capitalism: Manufacturing Scarcity in an Age of Abundance, is published by Mute, 2008. You can visit his website here.

(1) Financial Crisis, Daily Telegraph, 9 September 2008,

(2) ‘Objects that in themselves are no commodities, such as conscience, honour, &c., are capable of being offered for sale by their holders, and of thus acquiring, through their price, the form of commodities.’ Karl Marx, Capital, Vol. 1, Moscow, Progress, 1974, p 105

(3) The Truth about Kyoto, Guardian, 2 June 2007

(4) The World Bank and G7, Sustainable Energy and Economy Network, 14 October 2007

(5) New York Times, 28 December 2006

(6) ‘How to profit from Carbon Trading’, MoneyWeek, 27 October 2006

(7) ‘The Re:act guide to greenwashing’, Re:act, Cooperative Group, September 2008