It’s a jungle out there.
Really.
Even if you work in the rarefied world of Bonds, Elemental Banking and High Finance providing financial services for the environment, for countries and for Energy Infrastructure, you can’t fail to experience the vivid animal world.
Daily…
Some days it’s Babylon, some days its the nasty brutish Amazon jungle life – at night – trying to avoid the jaguars and venomous snakes but most days its like a colourful version of Kabul with wild animals and IEDs strewn about your path…
No wonder we feel like Phantoms going to work in the morning.
And don’t take my word for it – it’s a jungle out there – in case you haven’t noticed, listen to two distinguished colleagues.
Because here comes evidence of it from the best scientific minds.
Because by and large, the world’s financial system really is like a jungle.
And this is a realisation that may help save it from disaster.
An ecological theorist and the Bank of England’s head of stability have teamed up to show that if you apply the mathematical models used in ecology to financial systems, they behave much like ecosystems – with similar risks of collapse. Worryingly, the models bankers now use maximise exactly those risks.
If we go back in time – we see another view – cause until the 1970s, ecologists believed that the more complex the ecosystem, the more stable. Maybe you just lose one species and then the rest will fill in – as if by magic – because nature abhors a vacuum.
But then Robert May, from the University of Oxford, and others showed that such complex systems have critical points at which a change in one species can have dramatic and non-linear effects on others.
Losses can propagate, and even cause collapse. The stronger the connections and fewer differences there are among species, the greater the risk.
By substituting various kinds of lending and assets for predation, cooperation and competition, May and Bank of England banker Andy Haldane show that the global financial system might behave similarly.
Yet most high bankers still think like the erstwhile 1960s ecologists…
It’s well known that banks maximise their connectivity and similarity in an effort to increase stability, when in fact this may do exactly the opposite.
Complex pricing models for financial products like derivatives – which were central to the 2008-09 economic crash – also wrongly exclude non-linear effects. And its here that May and Haldane think that the development of more and robust ”ecological banking financial” models might help us stave off another world economic crisis.
In my mind that is a very valid thesis – as tested by myself and many others daily – proven in the filed of the daily grind.
And there are good and bad behaviours to be observed.
A case in point of the jungle experience banking ecosystem is the self serving behaviour of many players in the Carbon Banking world…
Like all nascent markets, the behaviour is extreme but manageable.
Join me for a small tour of the carbon banking jungle herewith….
BTW: Pith helmets, knee high boots and high caliber scope rifles are required
This particular jungle happens to be in Europe where nearly half a million pollution permits were stolen from a Czech carbon bank this week.
This event put the spotlight on an emerging black market for the right to pollute the planet, and it caused the shut down of most of the European carbon trading schemes.
The stolen permits would allow a company to pollute the atmosphere with almost half a million tonnes of CO2 carbon. Known as European Union Allowances (EUAs), they are distributed by the EU as part of its carbon trading scheme, set up to help the bloc of nations meet its Kyoto protocol targets.
Major companies can emit only as much carbon dioxide as their allocated EUAs allow. If they want to emit more, they must buy spare carbon permits from others. The pilfered permits could thus enter a black market in permits.
On Tuesday, a Prague-based carbon bank called Blackstone Global Ventures announced that someone had hacked into the Czech national carbon registry and transfered 475,000 EUAs from its account. Each EUA represents a tonne of carbon and the total value of the stolen permits was around €7 million.
Blackstone acts as a broker, pooling EUAs from companies with spare permits and selling them to others that need extra to offset their own emissions.
According to Point Carbon, an energy and carbon market news service, the thief swiftly transferred the stolen permits to a registry in Poland, then to others in Estonia and Lichtenstein, before they disappeared altogether. Reuters reported that other unnamed carbon account holders were also raided.
The Czech thefts are negligible in the overall volume of trade in EUAs. But they are not the first. In November, 1.6 million EUAs disappeared from the carbon account of cement maker Holcim, held in the Romanian national carbon registry. And earlier this month, someone tried to hack into the Austrian registry. Before this the British debacle of fake permits, the fiasco of Chinese CDMs, the Indian voided ones and the Swiss scam of tax avoidance via EUAs and many other schemes attracted attention but this string of thefts threatens to wreck confidence in the European market. Because according to Green Capital’s carbon market manager Julius Havensky, the paramount issue of well functioning markets is investor confidence in their inner workings and their honesty and trustworthiness by the large providers and main consumers involved. That is the recipe for success.
Adversely this could have wider repercussions for the European market is widely seen as a model for a future global market.
By today, five national registries in Austria, the Czech Republic, Greece, Estonia and Poland had halted all trade while they review security. They also want to avoid inadvertently trading in the stolen EUAs.
In theory, the stolen carbon credits should be identifiable by their serial numbers. This ought to make it impossible for anyone to sell them or use them to offset their own emissions.
But, as with stolen banknotes, that might be easier said than done.
Yours,
Pano
Bookkeeping in the European Carbon Market is far from watertight.
Past scams have included the sale of carbon credits more than once, so that they end up being used to offset emissions twice or more.
Cleansing the system of fraud may prove harder if the UN remains as the arbitrary and bureaucratic supreme authority of the system…
