More Woes for the European Carbon Trading Scheme

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.