Chris Cook’s critique of Carbon Trading : If you want to keep a donkey healthy, you don’t regulate what comes out of it, but what goes in

From the very beginning of our work at the P2P Foundation, we were in touch with Chris Cook, who has been working on open capital formats, a kind of peer to peer based market reform, which could be enabled by new methods of corporate governance, such as the UK-based Limited Liability Partnerships.

I’m must admit I still have a difficult time grasping what it is about, but I’m assuming that at least a few of our blog readers have a better understanding of market economics, and I wanted to mention Chris Cook’s work again, as he is involved in work in the sensitive Middle Eastern region.

What follows is first a general explanation of his approach, then the specifics of the proposed Gulf initiative. His work also has an interesting critique of carbon trading, since Kyoto thought as the panacea against global warming. The whole issue is reported here, in the Gulf Research Council’s Research Bulletin.

1. Introduction to Open Capital

Both Debt and Futures contracts require future performance of an obligation at a fixed price. Both result in a multiplication of risk known as “gearing” and require risk management through the use of risk capital by a credit intermediary (bank) or risk intermediary (Clearing House) as the case may be.

Such contracts, which rely upon the issue of a claim over value (IOU) by a Bank, or a “short sale” by a seller may be characterised as “Deficit-based” finance. Where a bank loan, or margin, is secured by collateral it may be said to be “deficit-based” but “asset-backed”.

Having spent much time in the study of Islamic finance in recent years I have yet to learn how “gearing” of any sort may be consistent with Islamic values.

“Asset-based” finance, on the other hand, is based upon investment through ownership of a productive asset and/or its’ production or revenues in a legal vehicle.

Conventional “Equity” finance is based upon ownership using the legal vehicle known as the “Joint Stock Limited Liability Company” or “Corporation”: however, the emerging use of unconventional legal vehicles is becoming a global phenomenon.

In Canada, for instance, virtually the entire Capital market now consists of two tiers, the first being shares in conventional listed Corporations, and the second being units in Income Trusts, whereby part of a Company’s gross revenues are committed into Trusts and units sold to investors.

The phenomenal growth of Income Trusts has been due to the appetite of Pension funds for gross revenues before company managements are able to access them: ie pre-distributed corporate revenues.

A similar outcome, but without the tax and management issues and complexities which make trusts so popular with lawyers, is also now possible using LLP’s (or in the US, LLC’s) to create “Capital Partnerships” whereby proportional units or “equity shares” in revenues or production are shared as between providers and users of capital. The outcome will be immediately recognisable to students of Islamic Finance as “Musharakah”.

The contracts I propose essentially consist of units in a “Pool” of commodity production constituted as a fund within a corporate “wrapper”.

Sellers will sell production into a Pool, and Buyers will buy production from the Pool, and the market price will be based upon an auction process established by reference to actual deliveries – the “spot” price.

Investors may buy and sell units in the Pool at any time but do not – by definition – participate in the auction.

The result is a new asset class not dissimilar to “Exchange Traded Commodity” funds. Producers may both “hedge” sales by selling production forward and receive what is in effect an interest-free loan: likewise consumers may hedge purchases by paying now for future consumption.

For investors the result is a simple new – un-geared, and hence suitable for “retail” investors – mechanism for investing in commodities.

The outcome is also of a continuous asset class of commodity “units”, as opposed to a fragmented and continually “rolling” series of contracts typically with monthly expiry dates. This will lead to dramatic savings in the transaction costs of holding an investment in commodities over time. If gearing is required units may be bought with borrowed money, or option contracts may be used.”

2. The rationale of a proposed Gulf Clearing Union

The Iranian OPEC representative informed us that he had advocated for some 20 years the institution of an “OPEC Bank” and related financial institutions.

In recent years we have seen proposals for a Gulf “Single Currency” among OCC states but this appears increasingly remote, particularly now that Kuwait has led the way in leaving the “Dollar peg”, and the dollar appears to be in secular decline in the absence of remedies the US is politically unable to apply.

While some commentators suggest that the Euro may come to replace the Dollar as a global reserve currency, the truth of the matter is that no deficit based currency is sustainable in the long term in a world of finite resources.

What then is an alternative?

Using the market and contract architecture outlined above it is possible to imagine how Gulf States, extending to Iran and Iraq, could commit a proportion of production of both crude oil and LNG to “Pools” the units of which could form a “Carbon dollar”.

In fact, I believe that it is only through the use of an “LNG Pool” in this way that a viable global market in LNG can ever be attained. This is due to the incompatibility between
• the need for spot cargo trading upon which to base a futures market; and
• the necessity to tie up production in long term contracts in order to obtain deficit-based infrastructure finance.

The “Carbon dollar” would initially be launched – in the same way that the Euro price was “frozen” in relation to all the national currencies of its participant Member states – by calculating the amount of carbon in each form of crude oil, LNG etc a dollar would buy on the launch date, or upon the accession of a new energy source to the Pool. “Carbon” Dollars would thereafter diverge from “Fed” dollars and would thereafter be a new “asset-based” globally “fungible” unit of exchange.

Transactions would be made upon a global market network, which, with the addition of a mutual guarantee would constitute the International Clearing Union which J M Keynes proposed at Bretton Woods in 1944 based upon an abstract “Value Unit” he called a “Bancor”.

Why would Banks possibly agree to such a radical structure?

In fact, we simply rephrase the question and ask Banks why they would wish to risk their capital by creating credit based upon it when in fact they may instead act as pure service providers:

(a) managing the bilateral creation of credit among trading counterparties – a classic “Trust Banking” approach;

(b) appraising investments, bringing investors together with investments and providing liquidity –a classic “Investment Banking” service.

So, in this model, Banks would have a future as a service provider rather than as an intermediary, and their interests are entirely aligned with those of other stakeholders as opposed to being in conflict with them.”

3. Proposed International Carbon Trading Union

The problem with the proposed global markets in “Carbon” eg emissions trading” and carbon offsets is that they are based upon markets in carbon emissions of CO2, as opposed to the carbon content of fuel.

The “deficit basis” of these carbon markets is best understood by an analogy overheard at a gathering of traders – always noted for the dispassionate and objective nature of their judgments:

“If you want to keep a donkey healthy, you don’t regulate what comes out of it, but what goes in”.

The Inconvenient Truth of these markets in carbon is that they were invented by trading intermediaries largely for trading intermediaries.

The use of Carbon dollars based upon the carbon in fuel as opposed to that in emissions essentially monetises Carbon, and means that to reduce Carbon use will – literally – be to save money.

There is a window of opportunity for Gulf States to lead the creation not only of a simple oil market architecture which is not dominated by manipulation and speculation by intermediaries, but also a new “asset-based” financial system based upon a “Carbon Dollar” value unit.

The use of this architecture in respect of LNG would combine both a new financing mechanism for the massive necessary investment in (and indeed refinancing of) global LNG infrastructure and a resulting new market in homogeneous undated and un-geared LNG “units” with vast potential.

Since LNG is a new market, without the sensitivities of the existing fragmented and opaque markets in crude oil so evident in the Iran Oil Bourse project, there is scope for development using the new “asset-based” architecture I describe above.

The concepts outlined in this article require an immense amount of research and development, in addition to diplomacy and statesmanship of a high order.

An International Carbon Clearing Union similar to the concept outlined by Keynes at Bretton Woods is both achievable and urgently necessary since no deficit-based financial system is in the long term sustainable in a world of finite resources.”

1 Comment Chris Cook’s critique of Carbon Trading : If you want to keep a donkey healthy, you don’t regulate what comes out of it, but what goes in

  1. AvatarIvo Cerckel

    TRUTH AND THE HUMAN PSYCHE

    What is it that prevents the human mind to acknowledge the Truth when it discerns/sees the Truth?

    Truth is ad-equation between the thing and the intellect, said Thomas Aquinas. (1)

    In Saudi Arabia, inflation is at quarter-century high because the country pegs its riyal to the weak US dollar. (2)
    As a result of Bush’s pleas to Saudi Arabia for OPEC, the Organisation of Petroleum Exporting Countries, to lift its production ceiling
    in order to bring down the price a oil which is now hovering at around 100 US dollar a barrel,
    the Saudis seem to have adopted the “a friend in need is a pest” attitude. (3)

    Why can’t observers conclude from this
    that Saudi Arabia should de-peg the riyal from the US dollar
    and that OPEC should price its oil in another currency than the US dollar?

    What is it that prevents the mind from ad-equating
    itself to these facts?

    Is it that, as Aristotle writes,
    when human intelligence is confronted with the highest truths,
    it is in the same situation as the bat who is dazzled by the light of the sun?

    And guess what?

    Former Federal Reserve Chairman Alan Greenspan said on Monday in Jeddah, Saudi Arabia’s second-largest city, that dropping the Gulf dollar peg would ease inflation. (4)

    Hence,
    the Gulf Cooperation Council (GCC) foreign ministers are to meet on Saturday, March 1, to discuss continuing pegging their currencies to the dollar (5),
    the next OPEC meeting being scheduled for Wednesday, March 5.

    Meanwhile,
    the Iranian Oil Bourse opened on Sunday February 17.

    The mystery concerning the Bourse remains however complete.
    Chris Cook, a former director of the London International Petroleum Exchange (IPE) and now a strategic market consultant after being involved from the beginning with the Iranian Oil Bourse, (I don’t know whether this is the same Chris Cook as
    the Chris Cook Michel is quoting), is even arguing that the Bourse is an illusion. (6)

    Indeed, we do not know in which currency oil is being traded on the Bourse.
    Some sources say it’s the Iranian rial.

    Others say indeed it’s the Russian ruble. (7)
    Hence the importance of this Friday 21, 2008 International Herald Tribune-article:.

    Moscow deepens ties to Iran’s energy sector (8)
    SNIP
    DUBAI: As the United States warns the world away from business with Tehran, Moscow is deepening its ties to Iran’s energy sector, underscoring Russia’s differences with Washington over Iranian nuclear plans and Kosovo’s independence

    What if it was gold
    (which is no longer available in Fort Knox,
    but is marked to market on a quarterly basis by the European Central Bank)?

    Gold left last week for da moon!

    We watch this new gold market together, yes?
    Thank You
    Another
    6/29/98 ANOTHER (THOUGHTS!) (9)

    Here’s a February 20 article of the Iranian News Agency which says
    that Iran’s Oil Exchange Market, which I suppose is not to be confused with the Iranian Oil Bourse, will be inaugurated on TOMORROW Wednesday, February 27
    and that oil dealings on that Market will be based on euro or Iranian rial (10),
    thus not based on ruble.

    Still watching …

    Ivo Cerckel

    ivocerckel AT siquijor DOT ws
    http://blogs.siliconindia.com/goldrupee/

    ENDNOTES

    (1)
    Conformity, con-FORM-ity, concerns only the form.
    Ad-equation says that not only form,
    but also the matter/substance/content/ousia of both the thing and the intellect must equalize.

    (2)
    Saudi inflation at quarter-century high
    Dubai: Sat, 23 Feb 2008
    http://www.tradearabia.com/NEWS/newsdetails.asp?Sn=ECO&artid=139116
    SNIP
    Saudi inflation hit 7 per cent in January, its highest level in more than a quarter century, as rents and food costs spurred price rises in the world’s largest oil exporter for a ninth straight month.
    Saudi Arabia has been grappling with inflationary pressures as the economy, the largest in the Arab world, booms on a near five-fold rise in oil prices since 2002 and because it pegs its riyal to the weak US dollar, pushing up some import costs.

    (3)
    From The Sunday Times
    February 24, 2008
    Sun shines on some as storm clouds gather over US economy
    American Account
    Irwin Stelzer
    http://business.timesonline.co.uk/tol/business/columnists/article3422371.ece
    SNIP
    Most important of all, Opec, which accounts for about 40% of world output, refuses to lift its production ceiling, despite personal pleas to the Saudis from Bush. The Saudis seem to have adopted the “a friend in need is a pest” attitude. Opec fears an economic slowdown will cut into demand, and that the dollar will fall further, reducing the purchasing power its cartel members receive in return for their oil.

    (4)
    (4a)
    Greenspan: Dropping Gulf Dollar Peg Would Ease Inflation
    Monday, Feb. 25, 2008
    JEDDAH/ABU DHABI
    http://moneynews.newsmax.com/money/archives/articles/2008/2/25/085005.cfm
    Former Federal Reserve Chairman Alan Greenspan said on Monday near-record Gulf Arab inflation would fall “significantly” were the oil producers to drop their dollar pegs, in contradiction to Saudi policy.
    +
    Saudi and UAE central bank chiefs spoke in favour on Monday of retaining dollar pegs, while QATAR’s prime minister advocated regional currency reform to avert possible unilateral revaluations designed to curb inflation.

    (4b)
    Russia quietly prepares to switch some oil trading from dollars to rubles
    By Andrew E. Kramer
    Published: February 25, 2008
    http://www.iht.com/articles/2008/02/25/business/place.php
    http://www.iht.com/articles/2008/02/25/business/place.php?page=2
    SNIP from page 2
    Alan Greenspan, the former Federal Reserve chairman, said Monday that high inflation in Gulf states would fall “significantly” if the oil producers drop their dollar pegs, Reuters reported from Jeddah, Saudi Arabia.
    The pegs restrict the ability of governments in the Gulf to fight inflation by forcing them to shadow U.S. monetary policy at a time when the Fed is cutting rates to ward off recession, while
    Gulf economies are surging on a near five-fold jump in oil prices since 2002. The central bank chiefs of Saudi Arabia and the United Arab Emirates spoke Monday in favor of retaining dollar pegs, while Qatar’s prime minister advocated regional currency reform to avert possible unilateral revaluations designed to curb inflation.

    (5)
    GCC foreign ministers council to meet Saturday
    http://www.kuna.net.kw/home/Story.aspx?Language=en&DSNO=1074112
    RIYADH, Feb 25 (KUNA) — The ministerial council of Gulf Cooperation Council (GCC) foreign ministers will hold their 106 meeting in the Saudi capital, Riyadh, under QATAR’s chairmanship on Saturday March 1.
    In a press statement on Monday, GCC Secretary-General Abdulrahman Al-Attiyah said this meeting held much significance as it will take place after the 28th GCC Leaders Summit in Doha which included announcing the establishment of the GCC’s common market.
    While saying discussions will include regional and international developments, he added that the meeting’s sidelines will include a forum between GCC foreign ministers with their Yemenite counterpart as part of supporting development projects in Yemen. (end) ay.
    ayh

    (6)
    Feb 27, 2008
    THE ROVING EYE
    Russia gas pact energizes Iran
    By Pepe Escobar
    http://www.atimes.com/atimes/Middle_East/JB27Ak01.html
    Chris Cook, a former director of the London International Petroleum Exchange (IPE) and now a strategic market consultant after being involved from the beginning with the Iranian oil bourse, told Asia Times Online “the trading ‘system’ is the rudimentary one [not much more than a spreadsheet] used by the Tehran Metal Exchange. As far as we know it is not even web-enabled”. Iranian ministers say the bourse will soon be online.
    Cook said, “There may be the odd ‘spot’ trade in petrochemicals, but these will probably be existing business – done over the phone – which would use the system for registration. There is no clearing house, nor is there likely to be, as the skills do not exist in Iran: therefore you can forget forwards or futures trading, even were they Islamically sound, which they are probably not.
    “We were told by the Iranian OPEC rep in London a few years ago that the trading of crude oil on any system was a medium-term project, at best.” In fact, Iranian ministers insist this is a medium-term project.
    According to Cook, “The long and short of it is that the recently launched Iranian oil bourse is an illusion. There is no real interest among the Iranian elite in any further transparency than exists now.”

    (7)
    Russian ruble could be used in oil trade deals in Iran – envoy
    15:30 | 15/ 02/ 2008
    http://en.rian.ru/world/20080215/99314908.html
    MOSCOW, February 15 (RIA Novosti) – The Russian ruble could be used as a payment instrument for deals on an Iranian oil exchange, the Islamic Republic’s ambassador to Moscow said on Friday.
    “Possibly in the future, we’ll be able to use the ruble, Russia’s national currency, in our operations,” Gholamreza Ansari said, adding that the Islamic Republic was currently busy launching a new oil trade exchange.
    The Islamic Republic’s oil minister, Gholam-Hossein Nozari, earlier said that Iran would launch on February 27 a commodities exchange for oil, petrochemicals and natural gas on the Persian Gulf island of Kish and that all financial settlements would be made in Iran’s national currency, the rial.

    (8)
    Moscow deepens ties to Iran’s energy sector
    By Simon Webb and Amie Ferris-Rotman Reuters
    Published: February 21, 2008
    http://www.iht.com/articles/2008/02/21/business/irangas.php
    DUBAI: As the United States warns the world away from business with Tehran, Moscow is deepening its ties to Iran’s energy sector, underscoring Russia’s differences with Washington over Iranian nuclear plans and Kosovo’s independence

    (9)
    http://www.usagold.com/goldtrail/archives/another4.html

    (10)
    Russian expert says oil dealings in Iranian Oil Exchange Market soon
    Moscow, Feb 20, IRNA
    http://www2.irna.ir/en/news/view/menu-237/0802200909234811.htm
    Head of Iran Contemporary Studies Center in Russia Rajab Safarov says in the coming months, Iran wants to privatize its oil companies, whose number is no more than 40, and start oil deals in Iran’s Oil Exchange Market.
    Safarov told Moscow-based daily Vermianovesti that Iran’s Oil Exchange is a crucial body that is expected to leave a drastic impact on the world oil market.
    He said in the market, oil dealings will be based on euro or Iranian rial.
    +
    Vermianovosti said Iran will inaugurate its Oil Exchange market on February 27.
    It quoted Iranian Oil Minister Gholam-Hossein Nozari as saying the exchanges will be in rial and possibly euro and the Exchange will be located in Kish island in Persian Gulf.

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