Infographic: Visualising The Size Of Australia’s Carbon Derivatives Time Bomb

On July 1, 2012, the government’s Clean Energy Future scheme will officially begin.

You know it as the carbon “tax”. It has been called a “tax” over and over and over again, by politicians, economists, bankers, and other vested interests, for a simple reason.

There are many who want you to think that the scheme to “put a price on carbon” is safe; that the government’s implementation of a “carbon price” is careful, methodical, and prudent.  A “fixed price” on carbon dioxide for 3 years. And only after 3 years, a transition from a fixed price to a “floating price” emissions trading scheme.

But there is something very important that they are not telling you.

There is a Ticking Time Bomb Hidden In The Carbon Tax.

It is called “derivatives”.

Carefully buried in 1,000+ pages of legislation, just 2 tiny, opaque clauses (109A and 110) have been included that allow the banks to immediately begin creating and trading unlimited quantities of unmonitored, unregulated carbon “securities” (another term for “derivatives”).

What are “derivatives”?

SHORT STORY: Pick something of value, make bets on the future value of “something”, add contract & you have a derivative. Banks make massive profits on derivatives, and when the bubble bursts chances are the tax payer will end up with the bill. This [graphic below] visualizes the total coverage for derivatives (notional). Similar to insurance company’s total coverage for all cars.

LONG STORY: A derivative is a legal bet (contract) that derives its value from another asset, such as the future or current value of oil, government bonds or anything else. [Example] A derivative buys you the option (but not obligation) to buy oil in 6 months for today’s price/any agreed price, hoping that oil will cost more in future. (I’ll bet you it’ll cost more in 6 months). Derivative can also be used as insurance, betting that a loan will or won’t default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value. The system is not regulated what-so-ever, and you can buy a derivative on an existing derivative.

Most large banks try to prevent smaller investors from gaining access to the derivative market on the basis of there being too much risk. Deriv. market has blown a galactic bubble, just like the real estate bubble or stock market bubble (that’s going on right now). Since there is literally no economist in the world that knows exactly how the derivative money flows or how the system works, while derivatives are traded in microseconds by computers, we really don’t know what will trigger the crash, or when it will happen, but considering the global financial crisis this system is in for tough times, that will be catastrophic for the world financial system…

Australia’s banks already trade in derivatives. Most of their derivatives bets are on movements in Interest Rates and Foreign Exchange Rates. And they have a total exposure to just these forms of derivatives, that is truly mind-boggling.

The numbers are so big, that no one can comprehend them.

You have to see it for yourself.

First, via the superb demonocracy.info website, here is an infographic to help you visualise what $1 Trillion looks like (click image to enlarge):

Click to enlarge | Graphic source: demonocracy.info

Got that?

$1 Trillion is a lot of money*.

The value of all Australians’ superannuation savings combined, is about $1.3 Trillion. As is the claimed annual “GDP” of the Australian economy.

Now, here is an infographic showing the Australian banks’ recent record high total “Off-Balance Sheet” derivatives exposure.  Remember, this is before the official start of a “price on carbon” allows the banks to start creating and trading carbon derivatives too (click image to enlarge):

Click to enlarge | Graphic source: demonocracy.info | Data source: RBA statistics

I want to emphasise the point made earlier.

Almost everyone incorrectly believes that no trading will happen until 2015. But the truth is, the banks can begin creating and trading in carbon derivatives from Day 1. Even though the scheme is supposed to be a “fixed price” scheme for the 3 years up to 2015.

Those 2 little clauses I mentioned earlier (109A and 110), are the reason why trading will begin from Day 1. Trading in carbon derivatives, that is.

They are opaque, easy-to-overlook clauses stating that the Clean Energy Future legislation does not prevent the creation of and trade in carbon “securities”.

The designers of the legislation (no, not the politicians), know full well that the banking industry can and does create and trade derivatives on everything.

Including the date of your death. That’s right. We have previously documented how banks are trading in Death Derivatives.

All that is needed, is for there to be a “price” put on some thing, effectively making that thing a “commodity”.

Once there is an underlying price, then banks can create a derivative.

Provided there is no law specifically preventing them from doing so.

It is that simple.

And that is why the Clean Energy Future scheme has those two little clauses buried inside. As Explanatory Memorandum 3.36 confirms, they are “included for the avoidance of doubt” that the government does NOT wish to prevent the banks creating carbon derivatives.

That is also why, just 3 days after the government released its draft legislation for “putting a price on carbon”, it was reported that:

Australian banks are eyeing opportunities to cash in on the proposed carbon tax by developing new financial products and services that capitalise on a market seen to be worth billions of dollars annually, according to a report by the Australian Financial Review.

Australian financial firms that have experience in European carbon markets, such as Macquarie Group Ltd, Westpac Banking Corp Ltd and ANZ Banking Group Ltd are particularly keen to establish their presence in the Australian market….

ANZ’s head of energy trading said the value of the derivatives carbon market would dwarf the $10 billion initially raised by the government, according to the AFR.

You have now seen just how mind-bogglingly enormous is our banks’ exposure to (mostly) Interest Rate and Foreign Exchange Rate derivatives.

$17.93 Trillion is equivalent to nine (9) skyscrapers made of pallets of $100 bills, each towering more than twice the height of the Sydney Harbour Bridge.

The $10 billion that the government will raise from forcing companies to buy carbon permits – the basic mechanism for “putting a price on carbon” – is almost nothing compared to the value of derivatives that banks will create and trade.

Unmonitored.

Unregulated.

Off-Balance Sheet.

The government’s claimed $10 billion in expected revenue from the Clean Energy Future scheme, is equivalent to just one (1) of the 10 x 10 squares of pallets forming the base of one (1) of those derivatives skyscrapers pictured above.

That’s one (1) storey in two hundred (200).

I hope that you now have a better idea – a clear picture in your mind’s eye – of what the ANZ Bank’s head of energy trading meant, when he gleefully said that the value of the carbon derivatives market would dwarf the $10 billion initially raised by the government.

A government that has followed the lemming-like lead of Ireland, by explicitly and implicitly putting taxpayers on the hook for the deeds (and misdeeds) of the banks, by placing the nation as guarantor for the solvency of the Australian banking system.

Meaning, just like the rest of the West, our banks are Too Big To Fail.

And from July 1, thanks to the Clean Energy Future scheme and those two little clauses, the government has handed the banks a licence to print.

It is really a licence to kill.

Tick.

Tick.

Tick.

Tick.

* If you wonder how it is possible that banks can have so much money just in derivatives bets, you might like to learn the truth. The “money” does not really exist. Almost all of the “money” in the world, is just electronic code in computers. And banks truly rule the world, by creating “money” (digits in computers) out of thin air, and lending it to you, at interest. Even the biggest central bank in the world, the Federal Reserve Bank, has admitted that this is how banking works. Learn more here.

Tags: carbon price, carbon trading, clean energy future, derivatives, infographic, OTC, TBTF