Market Failure
Carbon Markets Are Failing on a Global Scale

Everywhere you look, carbon markets are failing to achieve their stated purpose of incentivizing companies and individuals to not emit greenhouse gases. As Bloomberg reports, the price of carbon in markets around the world is too low to affect change:

[C]arbon markets in the U.S., Europe and Asia are collapsing, with prices so low they’ve become virtually valueless. The credits auctioned in the U.S. Northeast in June, for instance, sold for just $4.53 a short ton, a 40 percent drop from December. […]

The problem is that the permits are selling at a slower and slower rate. The surplus of allowances is becoming so large in systems run by Europe, California and Quebec — which together account for more than 90 percent of global trading — that by 2022 it could cover the emissions spewing from every car on Earth for a full year, according to estimates by the London environmental group Sandbag Climate Campaign CIC and Bloomberg New Energy Finance. […]

The markets are crumbling just as the U.K.’s vote to leave the European Union throws into question the future of the world’s largest market by threatening to shrink demand. Nor does the collapse bode well for China, as the world’s top greenhouse-gas emitter prepares to start its own next year.

It isn’t hard to trace the source of these too-low carbon prices. The designers of these various markets have a job that is both delicate and high stakes, as they attempt to set a price for carbon permits that is at once high enough to change behavior, but not so high that businesses (and the jobs and economic clout they carry with them) decide to pack up and move to a region or country with lower carbon costs, or even better a part of the world that doesn’t price carbon at all. So far, policymakers have (understandably) erred on the side of economic caution, choosing to over-allocate allowances at the risk of making their markets effectively worthless, which is where we find ourselves today.

But it’s a much more difficult task to try and figure out how to fix this problem. The EU is planning to withdraw credits from its system in the coming years to help inflate the price of carbon, and other markets elsewhere can use similar mechanisms to try and chase down that “Goldilocks” price. When push comes to shove, will politicians be willing to stand by a system that could potentially force out energy-intensive industries? That would be the worst case scenario—both economically harmful to the state, region, or country implementing the carbon market, and completely unhelpful in cutting global emissions—and unfortunately it’s something of an inherent risk in any piecemeal market solution in today’s globalized world.

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