Futures Markets – The Ultimate in Creative Destruction

Carbon trading in its current form becomes a huge concern when we contemplate the implications of trading in 'futures'.

Futures are simply agreements for the future delivery of something, at a specified price, at the end of a designated period of time. Futures are standardized agreements as to delivery dates (although in the vast majority of cases they are not settled by delivery) and the quality of the deliverable. Futures markets are used to modify portfolio positions and are seen as a cheaper option (transaction costs) than using the cash market.

There is considerable concern over the impact of futures markets in general. There is concern because commercial banks are creating derivative products that may result in severe financial problems with ripple effects on the overall economy in large measure because banks lack appropriate risk-management systems to monitor risk exposure.

This is the case, despite the fact that banks will attest to the opposite. It is typical of management hubris and complacency as has been documented in innumerable cases – especially in the financial services industry. Barings' demise, because of the workings of 'rogue trader' Nick Leeson, is just one case in point.

The U.S. General Accounting Office (GAO) concluded, among others, in a report May 1994 that there was a need for appropriate internal controls and for a regulatory framework requiring OTC derivative product dealers to maintain a common set of basic standards to manage risk.

Moreover, GAO concluded that financial reporting standards for derivatives risk were (they still are) inadequate and that there was a need for the Financial Accounting Standards Board (FASB) to implement comprehensive accounting rules.

Admittedly, GAO also noted that policy makers and regulators should not stifle the use of derivatives. Clearly, whether the introduction of futures markets destabilizes (due to speculative trading) prices of financial assets is an entirely empirical question. We will have to see.

But in the context of carbon trading it becomes highly suspect; simply because we are trading a defect product in an essentially immature and (in some instances) corrupt market.

The problem is acute because at present, the U.S. seeks to reduce much of its CO2 burden by buying future CO2 emissions from other countries.

The current U.S. view is to use carbon trading as much as possible. The view of the European Commission is that there should be a 'cap' on non-domestic policy actions, namely that only half of mitigation measures should be dependent on such offset measures. This difference of opinion has not yet been resolved.

Nonetheless, the futures game appears on and many in the financial services sector are now seriously contemplating the establishment of a market in future temperatures or sea level rises. Exchanges are now beginning to develop markets with weather-related contracts to help curb the financial disruption caused by climate change by providing 'smart companies' and investors with ways to hedge against the power of Nature herself.

Is it only me who is dumbfounded and repulsed? It seems no contemptible atrocity is beyond these mindless perverts and moral crooks. In their debilitated minds they see a "more variable climate" only in the context of risk volatility and increased profit uncertainty.

Yes, let's hedge our company's profits as the world implodes; one more reason not to take up the challenge of doing anything serious to mitigate the pending disaster; anything to continue the carnage. Heh, we can actually benefit from it! So let's make things worse! Seems to me like the logical conclusion for any seriously-minded capitalist who can benefit from a nifty futures deal.

It now appears that reinsurance and energy companies are jumping in with aplomb. Soon hedge funds and banks are expected to follow suit. Yes, let's gamble on sea-level rise, or increasing temperatures, or increasing/decreasing precipitation.

I have another idea. We should set up gambling syndicates and take bets on the number of species that are driven to extinction; or the number of poor and depraved who have to flee their homes in any particular year, maybe we can play that game by country and see if more Bangladeshis have to flee in 2012 than, say, Indians; or the number of people who will be infected by malaria or dengue fever; or the number of deaths by starvation as a result of global warming.

What these insatiable imbeciles too conveniently overlook is that however much they might gain financially, it will not revitalize the environment, it will not bring back vanishing forests, it will not provide breathable air to gasping children, and it will not provide arable land to starving billions.

But why should they care? Their possibilities are endless! It is all a wonderful game – the ultimate game of creative destruction! All bets are on!

Back To Top