‘Faltering’ EU climate policy undermining the City of London

The European Union’s “faltering” climate change policy is undermining the City of London’s leading role in carbon trading, according to a report by the Institute of Public Policy Research (IPPR).

The collapse of the carbon price within the EU Emissions Trading System (EU ETS) and the following “instability” has been a “major contributing factor” to the closing or scaling back of London based carbon trading desks at 10 financial institutions.

In 2012, London was home to 93.5 per cent of the global market in carbon exchanges, and the volume of contracts traded has increased 100 times from 2005 by 2012.

However, the oversupply of permits during the second phase of the EU ETS has been an “albatross around the scheme’s neck” and deterred investors, and the initial proposals to address the problem have failed, denting confidence in the EU’s political commitment.

Investment opportunities have been lost, and the crisis of confidence in the EU ETS has been a major contributory factor to the closing or scaling back of London-based carbon trading desks at 10 financial institutions – including UBS, Deutsche Bank, Barclays, JP Morgan and Morgan Stanley.

Other markets, such as Sidney and Singapore, are now being exploited for new opportunities in carbon trading, moving away from the tradition London centre.

One senior banker told IPPR: “Most activity is now in new markets – China, California, Australia, etc.

“Europe [is] very slow now. There is some residual demand for services related to the ETS but there is far more in the new markets.”

Reforming the EU ETS is “crucial” according to the report, because this would get the EU “back in front as the global leader” on low-carbon investment, whilst helping to secure the City of London’s role as the “premier home” of carbon trading and finance.

To achieve this, the IPPR said an “ambitious” carbon target of a 50 per cent reduction in emission by 2030 is needed, while a Carbon Market Policy Committee should be created to oversee the supply of carbon allowances, would also help “return confidence” to the market.