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EU Votes to "Fix" Its Carbon Market

The first step towards recovery is admitting you have a problem. The EU voted this morning to try and fix its broken carbon market. The bloc’s emissions trading system (ETS) issues permits allowing manufacturers to emit carbon dioxide. If they emit more than their permits allow, they have to buy more permits from firms that emit less than their allocation.

On paper, this gives a market incentive for industry to streamline processes and reduce emissions. However, wary of overburdening manufacturers and hamstringing the economy, Brussels overallocated emissions permits. The global recession led to an industrial slowdown and a decrease in emissions on its own, compounding the oversupply of permits. As a result, the price of carbon plummeted: in 2008, permits were trading at just under €30, but that price dipped below €3 in April after Brussels voted against a plan to fix the system.

Now, three months later, members of the European Parliament have decided to go ahead with a previously rejected plan to “backload” permit allocations, a move that will delay the issuing of 900 million permits and help reduce the 1.7 billion permit surplus.

While the price of carbon ticked up at this news, it’s not clear that it will rise to a level high enough to discourage profligate emitting. And even if this does “fix” the ETS and the price of carbon is sufficiently high, it isn’t clear that global net emissions will be affected: energy-intensive industry can always outsource emissions-heavy manufacturing to countries without carbon markets, a process called carbon leakage.

For many, the question of whether or not the ETS can be salvaged and emissions subsequently reduced is secondary to the effect that a higher price of carbon will have on an already struggling European economy. Carbon trading might just be a luxury the continent can no longer afford.

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