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EU’s Carbon Market Hits Record Low

The EU’s emissions trading scheme (ETS), launched in 2005 to curb carbon dioxide emissions, is breaking down as the price of carbon flatlines. The Financial Times has the story:

The world’s biggest carbon market was left in disarray on Thursday, with prices briefly crashing almost 40 per cent in a matter of minutes, after European politicians rejected a plan to prop up prices.

The cost of permits in the European Union carbon emissions trading system . . . fell to a record low of €2.81 a tonne after a vote in the European parliament. . . .

Carbon permits have lost 85 per cent of their value from mid-2011 as economic weakness has exacerbated a glut in supply. When the scheme was launched in 2005, polluters had to pay nearly €30 for each tonne of carbon emitted.

The idea was simple: If companies’ CO2 emissions left them with extra credits, they could sell the remainder to companies that polluted more than their allotment of credits would cover. In theory, this would nudge companies to become more efficient rather than compel them. So what went wrong?

The system overallocated credits, because its designers thought that if prices were too high, companies would outsource production to regions without such restrictions.  Then the economic downturn hurt industry, which lowered emissions and increased the credit glut. The price of carbon collapsed, and companies had no real incentive to innovate or lower emissions.

Many saw the ETS as a test case for carbon markets around the world. Countries like China and South Korea (and states like California) should take note: It’s not the solution to our emissions problem. It was doubtful from the beginning that this unwieldy policy mechanism could find the perfect carbon price: not so high that companies become less competitive, and not so low that companies can pollute at will. The system has already demonstrated its inability to account for fluctuations in the global economy. It just ain’t gonna happen.

Environmentalists stubbornly defend carbon trading schemes like this, despite evidence that they can’t work as intended. Can they offer better ideas? Because the planet could really use a few.

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