Get ready for subprime carbon.
Last year, I did a blog entry asking whether carbon was going to be the next subprime. As I said at the time, cap and trade is just another derivatives market.
We have further proof of that with revelations about Blyth Masters from JP Morgan. As The Guardian reported a few years ago, British-born Masters was one of the financial engineers who invented credit derivatives. As we know now, credit derivatives were designed to remove risk from a company's balance by creating artificial structures. Of course, all that did was encourage companies to take even bigger risks which helped create the mess we're now in. In effect, she helped build a weapon of mass destruction.
Now we have Bloomberg reporting that the same woman is leading JP Morgan's trade in carbon derivatives which are essentially aiming to do the same sort of thing by allowing companies to hedge a price over the longer term.
Bloomberg reports: "Masters says banks must be allowed to lead the way if a mandatory carbon-trading system is going to help save the planet at the lowest possible cost. And derivatives related to carbon must be part of the mix, she says. Derivatives are securities whose value is derived from the value of an underlying commodity – in this case, CO2 and other greenhouse gases. 'This requires a massive redirection of capital,' Masters says. 'You can't have a successful climate policy without the heavy, heavy involvement of financial institutions.'
Last year, I wrote a column warning that carbon could become a bubble that would make the US housing debacle look like a picnic. "In the end, an emissions trading market has one key problem: unlike other commodities markets, it is politically created and managed so it is vulnerable to vested interests and regulatory capture. As the subprime meltdown showed, politicians of all persuasions are susceptible. There is no reason to think they will be different with carbon."
What makes it even more disturbing is that the people who orchestrated the financial meltdown are now doing the same thing to the carbon market.
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