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Europe’s slowdown endangers cap-and-trade market

Scott Tong Jan 25, 2013
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Europe’s slowdown endangers cap-and-trade market

Scott Tong Jan 25, 2013
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The world’s most important carbon market — in Europe — is in trouble.Prices fell off the table yesterday, at one point down 40 percent. They’re down another 4 percent today. At least one top official worries the market could slide into irrelevance. We’re talking about the guts of the world’s efforts to fight climate change.

In Europe, it now costs five and a half bucks to spew a ton of carbon dioxide. That’s a bargain.

And to many Europeans it’s a problem — it makes life easy for polluters. In Europe’s carbon market, pollution permits get cheap as the economy sags. If you make less and shop less, you burn less energy.

“We’re using less coal, we’re using less oil, natural gas,” says economist Gilbert Metcalf at Tufts University. “Then we’re not releasing as much carbon dioxide into the air.”

Therefore, less demand for carbon permits. And there may be an oversupply, too, as the European system transitions from giving out permits to auctioning them off.

To Metcalf, the effect of low prices is to stall green innovation.

Forget fossil fuels for a second. Say you want to phase out something else: pencils.

“If there’s some policy reason why we should be substituting away from pencils towards pens,” Metcalf says, “then we want to make sure that the price of pencils doesn’t drop to such a degree that it hinders this transformation that we’re trying to bring about.”

Some European leaders want to intervene and push up carbon prices. But it’s a fight, and many energy-heavy industries are opposed. If prices fall toward zero, the market could be seen as irrelevant.

“Everbody looks at the European experience,” says economist Denny Ellerman at the European University Institute in Florence. “And that is by far and away the biggest system. If it fails, that will discredit cap and trade systems significantly. I think that would be very bad news for a global regime.”

Newer cap-and-trade markets — in places like California, Australia and China — are watching closely.

Metcalf at Tufts thinks the struggles suggest there’s a cleaner way to the future: taxing carbon. That idea is gaining renewed attention in the States, as lawmakers consider tax reform.

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