The Washington Post published an informative piece Monday about the European Union’s travails in trying to adopt a carbon-emission rationing system. To briefly sum up, the EU adopted a massive cap-and-trade program intended to limit emissions by making allowances to emit carbon, a commodity that could be bought or sold.
The idea was this would give the owners of big factories and power plants an incentive to reduce their emissions. If they got below a certain level they could sell the difference to other companies, hence making the act of reducing carbon output a profitable enterprise.
Some lawmakers tried to pass a bill for a similar cap-and-trade process in the U.S. a few years ago, but it stalled in Congress. This was a major project of then-Sen. John Kerry. At the time, advocates — which included not just environmentalists but big corporations like GE — warned we were “falling behind” other nations in part because we didn’t have a cap-and-trade plan.
So, how is that working out for Europe? Not so well, the Post noted:
That system, however, is in deep trouble. A drastic drop in industrial activity has sharply reduced the need for companies to buy emission rights, causing a gradual fall in the price of carbon allowances since the region slipped into a multi-year economic crisis in the latter half of 2008. In recent weeks, however, the price has appeared to have entirely collapsed — falling below $4 as bickering European nations failed to agree on measures to shore up the program.
The collapsing price of carbon in Europe is darkening the outlook for a greener future in a part of the world that was long the bright spot in the struggle against climate change. It is also presenting new challenges for those who once saw Europe’s program as the natural anchor for what would eventually be a linked network of cap-and-trade systems worldwide.
Carbon “started as the commodity of the future, but it has now deteriorated,” said Matthew Gray, a trader at Jefferies Bache in London and one of a diminishing breed of carbon dealers in Europe. “Its future is uncertain.”
What happened? A big factor was that the system turned out to be easily corruptible. Everyone wanted to make money, nobody wanted to actually take the hit from emission reductions and too many people had skin in the game. Financial shenanigans ensued:
At the core of the problem is a massive oversupply of carbon allowances. Demand for carbon began to fade in the late 2000s as a recession set in and factories across Europe dramatically curbed production. But there were also built-in flaws. Unlike newer cap-and-trade programs such as the one in California, Europe’s system never established a price floor that could have prevented a market collapse. In addition, too many free allowances were given to too many companies. Some, in fact, never had to pay for allowances at all, allowing them to hoard them or even sell their carbon credits at a profit. (Emphasis added.)
On April 16, the European Parliament was on the verge of temporarily tightening the supply of allowances to boost the price of carbon and shore up the ailing market. But opposition by countries led by Poland — a nation strongly dependent on heavy-emitting coal power plants — defeated the measure. The rejection sent the price of carbon plummeting to a historic low of roughly $3.60.
Then, guess what happened?
Yet critics argue that the low price of carbon has removed the incentive for European companies to reduce their carbon footprints. They point to a boom in the use of cheap imported American coal in European power plants.
Here’s a thought: Maybe instead of trying to place artificial limits on the use of carbon-based fuels, we should encourage the use of an existing ”fossil fuel” that emits less carbon? In other words, let a real market work.