Carbon Derivatives, The Next CDS Scheme?

We reported yesterday on the new CO2 hazard declaration. Bloomberg reports that the carbon trading scheme will be largely centered around derivatives, and the same woman who "invented" cerdit default swaps is working on the carbon version - on behalf of JPM. Although some CDSs serve useful purposes, we know what happened with some rather large banks who got engaged in CDSs. Will global carbon trading do the same, and to whom?

For the regular investor who cannot do CDSs, GRN is the Global Carbon ETF. As mentioned yesterday, it is great because it is very nicely uncorrelated with pretty much anything else, see previous post. The current RSI7s of GRN are:

Short-term: 74.38
Mid-Term: 56.72
Long-Term: 40.38

It is overvalued in the short term, in great part due to the jump yesterday, but is somewhat undervalued in the long term.

Back to derivatives: Says Bloooberg: "JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley will be watching closely as 192 nations gather in Copenhagen next week to try to forge a new climate-change treaty that would, for the first time, include the U.S. and China. The banks are preparing to do with carbon what they’ve done before: design and market derivatives contracts that will help client companies hedge their price risk over the long term. They’re also ready to sell carbon-related financial products to outside investors.

The woman is Blythe Masters, "the woman who built financial weapon of mass destruction", and seh 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…

Ms. Masters "oversees the New York bank’s environmental businesses as the firm’s global head of commodities…As a young London banker in the early 1990s, Masters was part of JPMorgan’s team developing ideas for transferring risk to third parties. She went on to manage credit risk for JPMorgan’s investment bank. Among the credit derivatives that grew from the bank’s early efforts was the credit-default swap".

Will the carbon derivatives be as regulated (unregulated) as CDSs?

George Washington thinks (Global Research article) thinks so: "Yes, they’ll get 'creative', and we have seen this movie before …an inadequately-regulated carbon derivatives boom will destabilize the economy and lead to another crash. I have previously pointed out that CDS sellers – like the big sellers of other financial products – know that the government will bail them out if CDS crash again. So they have strong incentives to sell them and to recreate huge levels of leverage. [...] And as I have previously pointed out: (1) the giant banks will make a killing on carbon trading, (2) while the leading scientist crusading against global warming says it won’t work, and (3) there is a very high probability of massive fraud and insider trading in the carbon trading markets".