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Is California's Carbon Market Going the Way of Europe's?

Southern California Continues to Battle Air Pollution

The price of carbon in California hit its lowest point this year at the most recent quarterly auction of emissions allowances. The price per metric ton of carbon was lower than expected, down 13 percent from the last auction in May. As Bloomberg reports, the low price was likely due to California’s stated plan to give away permits for free to avoid harming struggling industries:

California, the world’s 10th-largest economy, said July 18 that it will consider increasing by one-third the number of free allowances issued to refiners, metals producers and other companies facing higher costs and even job losses as they seek to comply with a program designed to cut emissions 15 percent by 2020.

So what does this mean? One green blogger sees the auction in a positive light, pointing to the fact that all available credits were sold as a sign of the market’s health. But the drop in the price of carbon must be worrying to state regulators. They have to be aware of the fact that in Europe, the price of carbon plummeted due to over-allocation of permits. Europe’s carbon market is currently broken because planners are wary of the effect a high price might have on energy-intensive industry. And that’s the fundamental problem with carbon markets: if the price is too low, companies lose the incentive to curb emissions, but if it’s too high, many companies will simply up and move to a location where they don’t have to pay for carbon.

California is trying to walk that line, and so far it’s in better shape than Europe. But there’s little reason to expect California’s greens will find the solution to that underlying flaw.

[Los Angeles smog image courtesy of Getty Images]

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  • Jim__L

    Beautiful mathematics meets ugly reality, once again.

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