For more than a decade, Europe has run a cap and trade system to combat climate change by giving companies a financial incentive to cut their greenhouse gas emissions. Across the continent, thousands of businesses have had their emissions capped. If they want to emit more, they have to buy special allowances or credits. If they cut their emissions, they earn surplus credits which they can then sell.
Hence, cap and trade.
Some environmentalists claim the system is a failure and is based on an unhealthy and outdated reverence for free markets.
“The notion of carbon trading took hold in the early 2000s — before the financial crisis — when there was a complete belief in the dominance of the marketplace,” said Charlie Kronick, climate campaigner for Greenpeace. “I think the belief was that markets could only succeed and lead to happiness, prosperity and goodness all round.”
Ten years after Europe launched the trading scheme, Kronick argues that the system has proved inflexible and counter-productive.
“The idea that carbon trading would be somehow central to driving a low carbon economy turned out not to be true in Europe and it probably won’t be true anywhere else either,” he said.
So what — exactly — went wrong?
It was mainly the price. The system depends on the credits or allowances fetching a high price in the market in order to dissuade companies from emitting more heat trapping gases like carbon dioxide. But that’s been the problem. The market has not delivered a high and stable price.
“In fact the price crashed from more than 30 euros per ton of CO2 to less than four euros,” said Damien Morris of the climate campaign group Sandbag. “The price crashed because there was a huge oversupply of allowances. That meant it was cheaper to buy the allowances and pollute than invest in clean energy and curb emissions. The price is still too low at around eight euros a ton.”
The surfeit of allowances was due to two main factors: governments had issued too many of the credits to their power stations and factories to protect them financially. And then, the Great Recession led to lower energy use.
But some true believers are still keeping faith: with the European carbon trading system:
“It was the first of its type in the world and there have been some inevitable teething troubles as you get in any business sector,” said Richard Folland, who runs a climate trade association. He said reforms are on the way which will set up a kind of central bank to intervene and hoover up allowances if they become too plentiful. Folland also points out that China plans to introduce the world’s biggest carbon market as part of its plan to reduce emissions.
But the skeptics say Europe has shown that the planet cannot rely on the vagaries of carbon trading. They argue that everything now depends on governments pledging stricter — and binding – emission targets. They hope — and pray — that will emerge this week from the Climate Change Conference in Paris.