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Paging Goldilocks
Europols Want to Dilute an Already Worthless Carbon Market

The EU’s carbon market has, to this point, been a failure. The Emissions Trading System (ETS), as it’s called, is flooded with carbon credits, and as a result the price of carbon is far too low to start inducing the sorts of emissions reductions initially envisioned by Brussels. The 2008 financial crisis and ensuing economic recession have only exacerbated this glut of allowances, so it’s no surprise that the EU is looking to reform the system.

But as they look to make these reforms, some lawmakers are advocating for more free credits given out to the biggest emitting companies. Reuters reports:

Under the current ETS trading phase, which runs from 2013 to 2020, the majority of allowances are sold via government auctions, with most of the remainder given free to industry. The European Commission’s reform for post-2020 proposes fixing the auction share at 57 percent of the total allowances, meaning a maximum of 43 percent would go free to industry.

Lawmakers from the European People’s Party (EPP) are calling for the share of free allocations to be higher than the 43 percent proposed by the EU executive. The overall cap on permits would not change, however, limiting the impact on trading. The hand outs are a concession worth billions of euros designed to help shelter factories and plants from added energy costs that they say could drive them out of Europe.

The Eurocrats in charge of this carbon trading system are delicately seeking a balance between two opposing goals: on the one hand making heavy emissions costly enough that companies change their behavior, but on the other hand not making it so costly that those same companies decide to pick up and move outside of the EU, taking their jobs and emissions with them—a process called carbon leakage.

This push to increase free allowances for heavy industry is therefore an attempt to keep those companies in the EU, and it underlines just how dangerous the creation of a regional carbon market can be. As long as firms have the ability to leave, a robust carbon price has the potential to be both economically damaging, environmentally worthless (thanks to carbon leakage), and politically poisonous.

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