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.