DAVOS-DSM CEO cautions on carbon derivatives dangers

* CEO calls for regulation of carbon trading

* Big fluctuations disruptive to investment plans

* Says EU must not run too far ahead on CO2 targets

By Ben Hirschler

DAVOS, Switzerland, Jan 27 (BestGrowthStock) – Carbon derivatives
should be regulated to stop the proliferation of instruments
with the potential to wreak a subprime-style crisis, the head of
chemicals group DSM (DSMN.AS: ) said on Wednesday.

“I think we learnt a lesson from the financial crisis. If we
develop products which we don’t understand then we run into
dangers,” Feike Sijbesma, the Dutch company’s chief executive,
told Reuters.

“I am to some degree amazed that we are discussing this for
the financial markets and on CO2 we are letting it go.”

Europe already has a thriving emissions trading scheme,
worth more than $100 billion a year, and that figure will grow
if the United States and other countries adopt their own “cap
and trade” schemes.

“I’m not against fluctuating CO2 prices, although the more
stable it is the better for the investing climate,” he said.

“But I am advocating having a market regulator overseeing
CO2 trading and watching that speculation and the development of
(derivative) products does not run out of hand.”

The issue is among a number that leaders of companies
focused on climate change plan to discuss this week at the World
Economic Forum in Davos, following global climate talks in
Copenhagen last month.

Cap and trade schemes raise power prices by forcing coal
plants to buy carbon emissions permits, costs which they pass to
the wholesale price of electricity — hurting big businesses.

The lack of progress in Copenhagen and U.S. President Barack
Obama’s political problems at home mean a U.S. carbon trading
scheme is unlikely to win support this year, analysts say.

But Sijbesma and many other industrialists are still
planning for a future in which more manufacturers have to pay a
price for the carbon they emit.

What they don’t want is uncertainty — exactly what Sijbesma
believes could result from the increasingly complex nature of
derivatives created by market participants.

“There are now already in development derivatives of CO2
prices that are so complicated that I do not understand it any
more,” he said. “If you get a reservoir of derivatives which
becomes so big that it becomes an industry in itself that is
very dangerous because you can get the tail wagging the dog.”

The other big issue for European companies already operating
under a cap and trade system is the growing concern that they
will be disadvantaged if the rest of the world drags its feet.

As a result, Sijbesma said the European Union should not
tighten its commitment on CO2 emissions beyond the current
promise to cut them by 20 percent in 2020 from 1990 levels.

“Europe needs to be careful not to run too much ahead of the
pack, and by doing that having a brilliant environmental policy
and no industry left any more,” he said.

Investment Analysis

(editing by Lin Noueihed)

DAVOS-DSM CEO cautions on carbon derivatives dangers