Sunday, February 24, 2013

Carbon Trading Program Falters in Europe

Just as President Barack Obama is trying to persuade Americans that a cap and trade system is the way to curb carbon emissions, the world’s flagship program in Europe is in danger of failing. The price of carbon traded in Europe has collapsed to around 5 euros per metric ton compared with 30 euros a few years ago...

The EU Emissions Trading System is intended to set a price on greenhouse gas emissions in order to force polluters like steel mills and power stations to clean up their acts. In the European union, factories and other installations ...  must either acquire or be allocated permits each year equivalent to the amount they emit. For instance, Luxembourg-based ArcelorMittal, the world’s largest steelmaker, was allocated about 87 million tons in permits last year.

The number of permits available each year is supposed to gradually decrease, squeezing emissions down. ... But the system has actually been very permissive — even a money maker for them. Largely because of the recession, the number of permits allocated has turned out to be far too great. Companies have cut back production because of lower demand and have ended up with surplus permits, which they have been selling. That has been one of the key reasons why prices of the permits, which are traded on exchanges just like oil and other commodities, have dropped so much. 

The current low price undercuts the purpose of the trading program — which was to encourage companies to invest in energy efficient technologies. Single-digit prices don’t encourage companies to do anything, analysts say. A much higher price is needed to force change — say 30 or 40 euros per ton or even higher.

All of this raises questions about whether a cap and trade program like the European Union’s is the best way to reduce emissions. Advocates say that the simplest way to cut greenhouse gases is to set a high carbon price and then let polluters make decisions about how to do it. That way governments are not picking technologies that may or may not work. But as Europe’s experience has shown, getting carbon pricing right is not easy.

The New York Times
February 20, 2013

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