Paging Goldilocks
Brussels Still Can’t Find the Carbon Price Sweet Spot

The European Union has a carbon market, but it doesn’t work very well. The EU Emissions Trading System (ETS) has long struggled to find that mythical goldilocks carbon price—high enough to induce emissions reductions but not so high that major industries choose to flee the bloc for regions without a carbon market (a process known as carbon leakage). That last concern is especially important to policymakers keen to retain any hint of economic dynamism within the EU these days. And so the ETS generously allocated free permits to some of its biggest emitters, choosing to err on the site of the economy. The end result was predictable: a low carbon price.

Now, a European court has found issue with the way in which these free permits have been allocated, and this week ordered the European Commission to examine and fix this problem over the next ten months. Reuters reports:

Europe’s highest court on Thursday ruled that the European Commission’s calculation for handing out free carbon permits to industries was flawed, raising the prospect of higher costs for big energy users.

The decision followed a court advisor’s opinion in November that the ceiling was too high, when a calculation known as the correction factor was used to cap the total amount of allowances distributed to shelter industry from added energy costs they say could drive them out of Europe.

Greens will cheer this decision while industrial groups bemoan it, but this isn’t the end of this debate—not by a long shot. The pendulum can swing between low carbon pricing to high carbon pricing and back again, but wherever it is at any given moment there will be active interest groups mobilizing to push it back the other way. And given that the setting of the price in this so-called “market” is a ultimately political decision, there is no end in sight to these sorts of fights. There might be some sort of goldilocks price somewhere in there by economic standards—a perfect balance between effectively pricing pollution and keeping economic costs in check—but there is little reason to think that it is an equilibrium point, or that the ETS even has the proper mechanisms in place to keep the system there.

This is the problem the EU faces with its regional approach to carbon pricing. Those fears of carbon leakage are real, because if heavy emitters leave to graze on greener grass, they not only take their business with them, but they also do nothing to abate their own emissions—both the environment and the EU economy lose. Brussels has been trying (and failing) to get this right for many years now, and it looks no closer to its idealized priced carbon future than it was when it started.

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