Who Knew?: European Carbon Market Is An Expensive Failure

At the United Nations climate change conference in Durban last December, the European Union graciously agreed to keep the faltering Kyoto Protocol alive by committing to continue operating its European Trading Scheme (ETS) carbon market. At Durban, the EU essentially agreed to impose higher energy prices on its citizens in the hope that somehow this would encourage the rest of the world to do the same thing by 2020. The principle seems to be: "If I bash my head with a baseball bat now, maybe you'll bash yours in a couple of years." Go figure. 

One of the chief goals of boosting the price of energy produced by burning fossil fuels is to encourage a shift toward energy generated by "cleaner" solar and wind power. How's that working out? Not so well, according to the Financial Times. The FT reports: 

Johannes Teyssen, chief executive of Eon, the German energy group that is one of Europe's largest, stunned an audience in Brussels last week when he pronounced the market broken. "Let's talk real," he said. "The ETS is bust, it's dead."

Upon its launch seven years ago, the market was supposed to work on a simple premise. Proponents hoped that by putting a price on carbon and forcing companies to pay for their emissions, it would prod Eon and others to pour money into green technologies and greater efficiency. But, as a result of a subsequent recession and poor management, the market is saturated – and could be for years to come – with permits that give companies the right to emit carbon without penalty. That has led to a prolonged slump in the carbon price. At roughly €7 per tonne, compared with a peak of nearly €30 in July 2008, it is a fraction of what policymakers and analysts had forecast it would have reached by now – and well below the levels necessary to justify the desired investments.

"I don't know a single person in the world that would invest a dime based on ETS signals," Mr Teyssen declared.

So how to fix this broken "market" in carbon permits? Impose government price controls, of course. 

Go here to read the whole excellent FT article.