More Woes for the European Carbon Trading Scheme

Ronald Bailey | February 22, 2007

Green Business reports:

The problems with the European Trading Scheme are well documented with the collapse in the price of a tonne of carbon dating back to May last year when it emerged that most countries in the scheme had set their carbon caps far too high, resulting in fewer firms than expected having to buy credits and causing the price of a tonne of carbon to plummet from over €30 to less than €10.

As one delegate observed "with some firms having carbon emissions capped at 110 percent of what they actually required it was always going to fail".

The EU is seeking to rectify the problem ahead of the second phase of the scheme, which starts next year, and recently rejected many member countries proposed emission allowances for the next phase as too high, ordering them to go away and come back with lower caps that will force more firms to cut emissions or buy credits.

However, [University of Amsterdam professor Catrinus] Jepma argued that with no link existing between the first and second phase of the scheme the cost of carbon credits will drop to almost nothing by the end of the year. Currently the price is already below one euro meaning there is little incentive for firms to cut emissions as it is cheaper to just buy in credits to offset their pollution.

The simple point that Jepma is making is that if emission allowances are not scarce, there will be no viable market for them.

Despite these problems, EU countries have just pledged to cut their emissions by 20 percent by 2020. That is all very well, but the majority of EU members are already likely to fail to hit their much more modest Kyoto Protocol targets.

Whole Green Business article here.

Comments

uncle sam|2.22.07 @ 12:24PM|#

I have long thought that many nations supported the Kyoto accord in hopes of handicapping the U.S. economy.

|2.22.07 @ 12:34PM|#

I reassert my contention that a made-up market with made-up "goods" created solely by the caprice of regulatory action is bound to fail. Genuine "free markets" do not have buyers and sellers herded into it at gunpoint.

If they want to order a cut in emissions they should just do it, for God's sake.

ed|2.22.07 @ 12:45PM|#

That's ok. The coming worldwide ban on incandescent light bulbs will solve all our problems.

fyodor|2.22.07 @ 12:57PM|#

If they want to order a cut in emissions they should just do it, for God's sake.

Um, well, HOW??? You, power plant over there, you cut YOUR emmissions (but not the power plant over HERE that contributed to my campaign), or else DIE!!

Okay that's unrealisitic. All power plants cut their emissions to one single arbitrarily chosen level or pay a big fat fine. Not efficient. And what's worse is when governments make decisions about what technology to use!

Seems to me the Euro's plan could work as long as the number of emission credits issued only allow for the targetted level of emissions, not for 110% of current levels. (On previous threads, some have said that the current program is just a trial run or some such.) No, it's not a free market, but it seems closer to one than any likely alternative to limiting carbon emissions, except maybe punitive taxation. But perhaps the larger question is whether the nations in question really have the cojones to limit those carbon emissions the way they say they want us to.

|2.22.07 @ 12:58PM|#

There is a straightforward response; the "greens" should be in the market buying up those dirt-cheap carbon allowances in order to retire them. If the regulators do not have the political power, or will, to set the number of allowances at an effective level, then the greenies should put their Euros where their mouths are. This obviously presupposes an effective enforcement regime to match output to allowances.

|2.22.07 @ 1:12PM|#

fyodor: your point about whether the nations really having the cojones to reduce emissions is precisely right. They tinker with "carbon-markets" in hopes of ducking the issue. And I'll grant that making an order enforced by fines is inefficient, but there has yet to be much evidence that artificial markets are any better. joe has a warm spot for the sulpher-dioxide markets of yesteryear, but those collapsed, too, when generators discovered they had overestimated the cost of complying with new regulations. In other words, the market had too many sellers and not enough buyers, a common problem when attempting to consciously design a market.

If they were serious about reducing carbon emissions, they would tax carbon use. It's ugly, but it would almost certainly work. They will not do this because, as you say, they are unwilling to put their money where their mouth is.

|2.22.07 @ 1:13PM|#

I reassert my contention that a made-up market with made-up "goods" created solely by the caprice of regulatory action is bound to fail.

One would think this is self-evident.

|2.22.07 @ 1:24PM|#

Not to be contrary, but SO2 markets in the US seem to be working.

|2.22.07 @ 1:45PM|#

The EU acted to enhance scarcity, and IIRC, the Netherlands and Belgium were the countries hardest hit.

|2.22.07 @ 1:49PM|#

Psst, hey kid, want some carbon?

perilisk|2.22.07 @ 2:30PM|#

With all the concern over income inequality these days, one wonders why they started with the assumption that existing companies were entitled to some number of free emissions in the first place (aside from the obvious economic disorder that would result -- which could be addressed by phasing out this entitlement over a definite period of time).

If CO2 is a public bad (and even if it isn't, this also applies to emissions shown to be toxic to humans in certain concentrations), then it makes sense to assemble a chart each year listing the marginal public cost of each additional unit emitted, take bids for licenses to emit, and keep selling until what companies are willing to pay to emit an additional unit is less than the pre-determined public cost of issuing the permit. The results will also be used to determine the magnitude of fines resulting from regulatory violations (ie, stealing).

Of course, politicians can attempt to wield influence to try to corrupt the marginal public cost calculation, either to offer a hidden industrial subsidy or to pursue an pro-poverty (sorry, anti-"consumption") ideological agenda. But absent such pressures, I think the researchers setting these limits will be reasonably honest about fulfilling their congressional mandate. The auction process itself could also be corrupted, but this is an existing problem.

Of course, the additional costs would raise prices for pretty much everything. Ideally, this would be offset by redistributing the proceeds of the auction on a per-capita basis, as per Friedman's "negative tax". Giving it to the government would be disastrous, as it would make more people dependent on welfare programs of various sorts, which unlike a tax credit, will almost certainly come with chains attached.

Sean Healy|2.22.07 @ 4:14PM|#

Does phase two involve Fairtrade carbon? Because I heard Fairtrade gives commodity producers a fair price - the kind of price they deserve, even if nobody wants to buy from them.

Paul|2.22.07 @ 7:34PM|#

Does phase two involve Fairtrade carbon?

No, but they are discussing shade-grown carbon. This carbon is farm more environmentally sustainable.

|2.23.07 @ 9:59AM|#

"Not to be contrary, but SO2 markets in the US seem to be working."

In opposed to your link...

|2.23.07 @ 11:56AM|#

Not to be contrary, but SO2 markets in the US seem to be working.

It appears to be here.