Britain to admit Kyoto refuseniks into carbon trading market

Confidence in the emerging market for carbon emission permits was given a double boost yesterday as the bank Morgan Stanley unveiled a $3bn (£1.6bn) investment and the UK said it would enable companies from non-Kyoto signatory countries to trade through Britain.

Morgan Stanley said it planned to expand its carbon trading business through a $3 bn investment that includes projects related to reducing greenhouse gas emissions. The move marks a significant expansion of the bank's existing carbon trading activities that it launched in 2004 within its commodities division.

It makes the bank, led by John Mack, Morgan's chairman and chief executive, the latest blue-chip group to expand into the carbon emission trading market. Goldman Sachs, Barclays Capital and JP Morgan have increased their investment in recent years. The scale of the investments may lead to fears of a repeat of the late 1990s boom in internet stocks when investors oiled money into ventures they understood little about.

Governments allocate permits for each tonne of carbon emitted, meaning inefficient companies have to buy permits from cleaner rivals. The market across Europe hit a bump earlier this year after it emerged that some governments had issued an excessive number, promoting a collapse in the market price for carbon.

John Hawksworth, the head of macroeconomics at accountants PricewaterhouseCoopers, and an expert on the economics of climate change, said: "I support the principle of carbon trading markets as it is an efficient way of setting the price.

"But the market is young and we have seen in Europe that the price can be volatile and ... an absence of long-term commitments by politicians means the market is not as strongly developed as it might be."

The market has already been undermined by the refusal of US President George Bush to sign up to the Kyoto protocol that set targets to reduce emissions.

Sir Nicholas Stern, a former chief economist of the World Bank who is calculating the costs of climate change for the UK treasury, will say on Monday that doing nothing will wipe out 20 per cent of the world economy.