UK may take lead in carbon trading

City of London eyes emerging market

Special report: global warming

Paul Brown in Bonn
guardian.co.uk, Tuesday 24 July 2001 02.32 BST

London is set to become the world's international trading centre for a multibillion pound new industry which yesterday's climate agreement will spawn, providing a potential spur to British technology and jobs.

Under the agreement reached in Bonn, companies that save carbon by installing new technology or renewables will be able to sell the carbon dioxide saved to a company unable or unwilling to do so.

The new scheme will mean that every tonne of carbon dioxide saved in the UK by energy efficiency, renewable energy or new technology becomes an asset.

Every tonne of carbon saved could earn £10 on the international carbon market - a new system of global trading specifically designed to cut the world's emissions of green house gases through trade.

With the US having written itself out of the Kyoto protocol, analysts believe London has the potential to dominate the new trading system in which tonnes of carbon dioxide will be sold on the commodity markets in much the same way as cocoa or rice. Several companies have already begun forward trading in the hope that the Kyoto proposals would become reality, and a Europe-wide trading scheme could come into operation as early as 2005.

The government has already consulted industry about a UK carbon trading scheme.

Michael Meacher, the environment minister, exhausted but elated in Bonn at the end of 24 hours of continuous talks, said: "We are on the verge of setting up the first domestic emissions trading system in the world.

"With this agreement it will surely grow into an international system, with the City of London being the major player in the global system of trading carbon."

The trading system will require domestic legislation but Mr Meacher said this would go through parliament as early as possible and industry hopes the domestic scheme will be up and running by next year.

One company present in Bonn has already set up a futures market in carbon dioxide and "sold" 5 millions of tonnes.

The managing director of CO2e.com, Steve Drummond, said: "We have been hoping for this because it gives British business certainty. They know if they invest in new technology and new jobs they will get a financial reward."

He said that companies were already investing in energy efficiency and clean technologies because it made sound business sense but "if they knew in addition that for every tonne of carbon dioxide saved they would also earn up to £10 it would be a huge incentive".

International trade in carbon is one of the cornerstones of the Kyoto agreement. Companies or countries which overshoot targets and have carbon to spare will be free to trade it. Some countries such as Japan see such trading as necessary to reaching their demanding 6% cut in 1990 levels of greenhouse gases.

It is this potentially lucrative market which first attracted Russia to the Kyoto deal. Because of the collapse of its economy Russia is within the 1990 target already, and will be able to sell any additional savings it makes for hard currency.

The keenness of business to exploit the possibilities was illustrated by the fact that the Russian Electric Company, which attended the talks in Bonn, was meeting Mr Drummond within three hours of politicians agreeing the deal.

He was cautious about how prices of carbon would hold up when large quantities became available. He predicted the starting price would be £10, but would probably slip as international trading got under way and technology improved. By 2008 he thought it might fall to £4. "We can only guess how prices will go but this is a potentially massive market," he said.

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