Carbon Derivatives Dangers

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Carbon derivatives should be regulated to stop the proliferation of instruments with the potential to wreak a sub-prime style crisis, the head of chemicals group DSM (DSMN.AS) said on Wednesday.

"I think we learnt a lesson from the financial crisis. If we develop products which we don't understand then we run into dangers," Feike Sijbesma, the Dutch company's chief executive, told Reuters.

"I am to some degree amazed that we are discussing this for the financial markets and on CO2 we are letting it go."

Europe already has a thriving emissions trading scheme, worth more than $100 billion a year, and that figure will grow if the United States and other countries adopt their own "cap and trade" schemes.

"I'm not against fluctuating CO2 prices, although the more stable it is the better for the investing climate," he said.

"But I am advocating having a market regulator overseeing CO2 trading and watching that speculation and the development of (derivative) products does not run out of hand."

The issue is among a number that leaders of companies focused on climate change plan to discuss this week at the World Economic Forum in Davos, following global climate talks in Copenhagen last month.

Cap and trade schemes raise power prices by forcing coal plants to buy carbon emissions permits, costs which they pass to the wholesale price of electricity -- hurting big businesses.

The lack of progress in Copenhagen and U.S. President Barack Obama's political problems at home mean a U.S. carbon trading scheme is unlikely to win support this year, analysts say.

But Sijbesma and many other industrialists are still planning for a future in which more manufacturers have to pay a price for the carbon they emit.

What they don't want is uncertainty -- exactly what Sijbesma believes could result from the increasingly complex nature of derivatives created by market participants.

"There are now already in development derivatives of CO2 prices that are so complicated that I do not understand it any more," he said. "If you get a reservoir of derivatives which becomes so big that it becomes an industry in itself that is very dangerous because you can get the tail wagging the dog."

The other big issue for European companies already operating under a cap and trade system is the growing concern that they will be disadvantaged if the rest of the world drags its feet.

As a result, Sijbesma said the European Union should not tighten its commitment on CO2 emissions beyond the current promise to cut them by 20 percent in 2020 from 1990 levels.

"Europe needs to be careful not to run too much ahead of the pack, and by doing that having a brilliant environmental policy and no industry left any more," he said.

Source: Reuters