Ecocentric

If Carbon Markets Can’t Work in Europe, Can They Work Anywhere?

Europe has always been at the forefront of global climate policy. But its landmark carbon market is on the brink of failure.

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America may be a bit of a mess when it comes to climate policy—though that mess has been surprisingly effective in reducing carbon emissions in recent years—but environmentalists could always look across the Atlantic Ocean to Europe, where greens are green, cars are small and global warming actually matters. Countries like Germany and Spain have led the way in supporting renewable energy, and cities like Amsterdam and Copenhagen put America to shame when it comes to encouraging dense development and carbon-free cycling. But the green jewel was the Emissions Trading Scheme (ETS)—the European-wide carbon market, by far the largest such system in the world. The ETS, launched in 2005, allowed Europe to put a common price on a ton of carbon, which was meant to encourage utilities and factories to reduce carbon emissions in the most efficient way popular. A similar system carbon cap-and-trade system for the U.S. died in the Senate in 2010, and there’s little chance it will be revived any time soon.

But the ETS—and carbon trading more generally—is not doing well, and its problems are taking some of the green shine off of Europe. Since its launch the ETS has struggled, with the price of carbon falling as the 2008 recession and overly generous carbon allowances undercut the market. In the ETS business are given free allowances to emit carbon—too many free allowances mean they don’t need to reduce their carbon emissions much, which erodes the demand for additional carbon allowances on the market and causes the price to drop. Prices fell from 25 euros a ton in 2008 to just 5 euros a ton in February. There was a way to fix this—take 900 million tons of carbon allowances off the market now and reintroduce them in five years time, when policymakers hoped the economy would be stronger and demand would be greater. As anyone who’s taken Econ 101 would know, artificially reducing the supply of carbon allowances in such a drastic way—something called “backloading”— should force the price back up.

(MORE: As the World Keeps Getting Warmer, California Begins to Cap Carbon)

But on April 16, the European Parliament surprised observers by voting down the backloading plan. In turn, the European carbon market collapsed, with the price of a carbon allowance falling by more than 40% over the day. “We have reached the stage where the EU ETS has ceased to be an effective environmental policy,” Anthony Hobley, the head of climate change practice at the London law firm Norton Rose, told the New York Times. The ETS is a mess.

Backloading failed because even in very green Europe, economic concerns seemed to trump environmental ones. European Parliamentary members worried that any action that would cause the price of carbon to rise would add to European industry’s already high energy costs. Europe, unlike the U.S., doesn’t have relatively cheap, relatively clean natural gas to help cushion that blow. At the same time, European nations like Germany are rethinking some of their renewable energy policies, concerned by the rising cost of electricity. It looks like a textbook example of what Roger Pielke Jr. calls the “iron law of climate policy“: when climate policy starts to hurt economically, even the greenest states start to back away.

It’s possible that backloading may get a second chance before the European Parliament, and even without a viable carbon market, Europe is still the global leader in climate action. Nor is the ETS the only game in town. California launched its own cap-and-trade system this year—though that’s come under political pressure as well—and Australia has introduced a price on carbon. China may do so as well. But the hope that we may be able to reduce carbon emissions the same way we cut pollutants like sulfur dioxide and nitrous oxide—through a well-run cap-and-trade —seems to be dimming, a victim of its own complexity and a sluggish global economy. That might leave the door open for other policies, including a straight carbon tax, more support for renewables or increases R&D funding for carbon-free power. We could use all three, but carbon markets may be finished. If carbon trading can’t make it in Europe, it can’t make it anywhere.

MORE: Obama Talks Climate Change. California Is Acting on It

16 comments
ripudaman.malhotra
ripudaman.malhotra

Europe would do much better in terms of CO2 emissions by encouraging shale gas development.

EDimantchev
EDimantchev

Will carbon markets work elsewhere? To answer your question it is worth defining what you mean by "work". Most people agree the eu ets had two main goals: 1) to deliver EU's emission reduction targets cost effectively, and 2) create a carbon price that would incentivize low carbon investments. The first purpose the system has fulfilled very well. Academics have shown the eu ets has reduced emissions in the past. What you refer to now as its inability to reduce emissions is a result of the fact the current EU reduction targets have become easier to meet, mostly due to the continent's financial woes.

When you say it does not work, you would be right to point out that the system has not met expectations when it comes to its second goal. Falling prices and uncertainty fail to spur clean technology innovation and deployment. 

So back to your question, will it work elsewhere? As I implied, the reason for a weak carbon price signal is the market's design of having a fixed cap, which makes prices more vulnerable to changes in demand. Introducing variable supply, which can act as a price floor and ceiling, will, in theory, create a stable long term signal for investments. This is exactly how the Californian market is designed. It remains to be seen whether it will provide a proof of concept for a more effective carbon market.



EDimantchev
EDimantchev

Will carbon markets work elsewhere? To answer your question it is worth defining what you mean by "work". Most people agree the eu ets had two main goals: 1) to deliver EU's emission reduction targets cost effectively, and 2) create a carbon ptice that would incentivize low carbon investments. The first purpose the system has fulfilled very well. Acadrmics have shown the eu ets has reduced emissions in the past. What you refer to now as its inability to reduce emissions s

freedomwarrior0
freedomwarrior0

@TIME If you're talking about 'carbon credits', that is just a way to buy your corp more pollution credits and avoid safe technique(air qual

ssabihahmed
ssabihahmed

@TIME It can work in several other locations. Like in Asia and Middle east markets

DonaldCampbell
DonaldCampbell

Given an accelerating rate of climate change and the foreboding likelihood of disastrous consequences, a  carbon tax based on CO2 equivalent with dividends distributed to the people (www.citizensclimatelobby.org) is a practical solution. We must cancel our dependence on carbon-based fossil fuels. A carbon tax would make renewable sources for energy more competitive and stimulate their growth. Already we have proposed legislation along these lines.

PJMD
PJMD

So if cap and trade doesn't work, let's try something else, shall we, before we cook the planet? Here's a better solution, less gimmicky and volatile, less subject to speculation and derivative betting: A STRAIGHT UP CARBON TAX on the carbon content of fossil fuels, progressively-rising, revenue-neutral, collected at their source, with the funds distributed to all households via a check or tax break. Border tariffs level the playing field between countries, consumers are protected, and the FREE MARKET gets the price signal it needs to unleash the next industrial revolution. End all subsidies to all fuels and account for the social costs of all fuels, then see who is the fairest of them all. 

Government gets out of the way and just enforces the rules while the market corrects the biggest market failure in the history of money: destruction of the environment that supports the civilization it's supposed to serve. Citizens Climate Lobby is pushing for this! 

JimBullis
JimBullis

But not to be pessimistic; there are constructive possibilities.  We just need to start some creative thinking.

My approach involves some very different forms of cars and trucks.

Then it calls for vastly expanded agricultural activity based on universal irrigation.  And here is where government could actually do a wise thing by building water distribution infrastructure that would enable such universal irrigation.

And being ever hopeful, the Miastrada Dragon is being developed to support the anticipated agricultural activity.  See youtube: Miastrada Dragon At Work to get the general idea.  Or use the easy link:  http://www.youtube.com/watch?v=7nyPUqSuqrg

JimBullis
JimBullis

Bryan Walsh,

Your opening sentence shows lack of understanding of what has been happening. 

The mess you speak of has more likely made the economy worse.  The reduction of CO2 emissions in recent years has mostly been a result of the faltering industrial system.  This faltering is the reason there is such persistent unemployment, which is, in turn, the main reason that the 'mess' should not be allowed to generate any further signals which discourage productive industrial activity.

It is quite likely that we could accomplish much in the way of CO2 reduction by instigating a deep depression in the developed world countries.  Ah yes, how green was our country, in 1936?

rgould22
rgould22

Global warming from CO2 was exposed as a fraud years ago by climate gate and mother nature. So the only objective of a carbon tax is to separate money from the working class and give it to the government. So that can work anywhere. As for stopping the natural process of global warming....it's a total scam and those behind it should really be in a Mexican jail.

sumguytang
sumguytang

@rgould22 Unfortunately your argument is solely based on the use of words like fraud, scam and hoax, the phrase "climate gate" and of course threats "those behind it should really be in a Mexican jail".  

 Good science is a quantitative analysis of cause and effect relations.  It's this absence and reliance on what are essentially pejoratives, expletives and threats which make your arguments political in character.  You are clearly not interested in science, but in some personal opinion carelessly developed in some odd political arrangement.

Look at ZacPetit's post.  There may be those climate scientists who disagree and can present data and a reasoned argument that contravene's his graphics, but at the very least ZacPetit seems concerned with the scientific method.