New Report Sounds Alarm on Subprime Carbon and the Need to Regulate Carbon Markets

If it is
not structured properly, global warming legislation could lead to the creation
of an enormous, poorly regulated derivatives market with failures mirroring
those that led to the current financial crisis, according to a report released today by Friends
of the Earth.

The report, Subprime Carbon? Re-thinking the
World's Largest New Derivatives Market, finds that
existing financial regulations, as well as those in major cap-and-trade bills,
are inadequate to govern carbon trading, creating a potentially huge regulatory
gap.

"Global warming has reached a crisis point, and
it's imperative that Congress move quickly to put solutions in place, but
it's also important to be careful and do this the right way from the
start," said Michelle Chan, a senior policy analyst at Friends of the
Earth and the author of the report. "If we aren't careful, we could
end up creating a massive, poorly regulated derivatives market that not only
poses risks to the broader financial markets, but also undermines efforts to
save the climate."

The report outlines how lessons
from the current financial crisis apply to carbon markets, which could become
the largest derivatives markets in the world. In particular, it raises concerns
about "subprime carbon," risky carbon credits based on uncompleted
offset projects (projects designed to sequester or reduce greenhouse gases). Subprime
carbon credits may ultimately fail to reduce greenhouse gases and, like
subprime mortgages, could collapse in value, yet they are already being
securitized and resold in secondary markets. The report recommends that
lawmakers include carbon trading in current debates about financial reform, and
warns against hastily creating carbon markets without proper oversight.

"Fortunately, there are ways to minimize the
environmental and financial risks of carbon trading, including prohibiting
offsets and creating a stable price path for carbon," Chan said. "We
should also avoid putting all our eggs in one basket. Although many lawmakers
are talking about carbon trading as if it's the only way to reduce
greenhouse gases, no single approach will solve climate change-a diverse
set of complementary strategies is needed."

The full report can be viewed at https://www.foe.org/subprimecarbon.