Photograph by Wolfgang Von Brauchitsch, Bloomberg/Getty Images
Published April 18, 2013
The European Parliament this week voted 334-315 (with 60 abstentions) against a controversial "back-loading" plan that aimed to boost the flagging price of carbon, which since 2008 has fallen from about 31 euros per tonne to about 4 euros (about $5.20). Since the vote, the price has fallen even farther, to 2.80 euros. The collapsing market is hardly the kind of firm foundation needed for building a clean-energy economy. (Related: "Renewable Energy Not Growing as Fast as Necessary," and "IEA Outlook: Time Running Out on Climate Change")
"Now, the market is dead, as far as I can see," said Steffen Böhm, director of the Essex Sustainability Institute at Britain's Essex Business School.
What will be the aftermath of the ETS collapse? Here's a quick primer on what happened, and what it could mean elsewhere, particularly in California, which inaugurated a new carbon market at the start of this year. (Related: "California Tackles Climate Change, But Will Others Follow?")
Q: First of all, what's a carbon market?
A: The U.S. introduced the concept of using market forces to rein in greenhouse gas emissions during the talks that lead to the 1997 Kyoto Protocol, an international agreement to combat climate change. Ironically, Europe wasn't initially keen on the idea. But after it failed to enact an EU-wide carbon tax, Europe ultimately launched the ETS in 2005.
The basic idea is setting an ever-tightening cap on carbon dioxide (CO2) emissions, then issuing allowances up to that level. Major contributors of greenhouse gases-mainly power companies and heavy industry-face heavy fines if they don't have enough allowances to cover their emissions.
The cleanest companies can either bank the ones they don't need, or sell them to companies in need of more.
The idea is to make it more expensive to emit CO2, and to make green technologies-including renewable fuels, and carbon capture and sequestration-that are initially expensive more competitive with fossil fuels.
Trading certainly was happening; Bloomberg estimates that the ETS represents 89 percent of the $61 billion worth of carbon emissions traded worldwide.
But experts say a price of 30 euros ($39.20) or more is needed for the ETS to be effective at driving adoption of cleaner energy. (Related: "As U.S. Cleans Its Energy Mix, It Ships Coal Problems Abroad")
Q: So why has the price of carbon in Europe fallen?
A: "There were far too many allowances in the system in the first few years," Böhm said. Moreover, he said, Europe was flooded with "cheap CDMs," or clean development mechanism offsets that companies earned for funding green initiatives in developing countries. But what really pummeled the market was the 2008 Great Recession and the subsequent anemic recovery, said Tomas Wyns, director of the Center for Clean Air Policy Europe, a Brussels-based nonprofit, because demand for goods and power has dropped.
Q: Recessions do happen, so wouldn't that always be a problem for carbon markets?
A: Wyns certainly thinks so. The problem, as he sees it, is that while demand fluctuates, the supply of allowances is fixed. "There is no way to respond to the supply side in its (the ETS's) current form." One possible fix, Wyns said, would be a price-stabilization reserve that buys up allowances when prices are too low.
Q: Wouldn't a simple, straightforward carbon tax be a better solution?
A: Some economists think so, and that was certainly the first choice of many European policymakers. But in the EU, a tax needs the support of all member states, and that proved impossible. (Related: (Related: "British Columbia Rethinks Its Pioneering Carbon Tax" and "Coal-Fired Australia, Buffeted by Climate Change, Enacts Carbon Tax")
In the United States, Republican antipathy toward new taxes also makes a carbon tax unlikely. In addition, "taxes have a way of hitting the wrong people at the wrong time and can be pretty inflexible, as well," Böhm said,
Q: What would backloading have done, and would it have worked?
A: Back-loading would have taken a huge chunk of allowances out of the market for two years, creating a temporary scarcity that proponents say would have boosted the price of carbon. But Wyns estimates that, at best, it would have only pushed the price up to about 10 euros ($13.08), well below what would be necessary to effect change.
Q: Who opposed it, and why?
A: Mainly heavy industries that use a lot of energy, Wyns said. These industries-ranging from steelmakers to beer brewers-argued that if carbon prices rose, they wouldn't be able to compete against American rivals who are benefiting from cheap shale gas. "That's a very simplistic argument," he said, "but it plays well." (Related: "U.K. Dash for Gas a Test for Global Fracking")
Q: Is that the end, then, for ETS?
A: Probably not. As Wyns said: "This is Europe; these things never end." He expects some sort of revised plan will surface eventually.
But Böhm, who is not a fan of carbon trading, said, "They really need to start from scratch." He doubts that will happen, because the political backlash from admitting failure would be too terrible.
Q: The U.S. Senate killed a cap-and-trade plan in 2010, and Japan has also backed away from one. Now, given the ETS debacle, is carbon trading essentially a dead concept?
A: No. California launched an ambitious emissions market last November (though it faces lawsuits), and Korea is considering one, as are seven Chinese provinces. "The good thing is other countries will learn lessons from Europe," Wyns said. Clearly, he would hope that future markets have a mechanism to respond to an oversupply of allowances. (Related: "British Columbia Rethinks Its Pioneering Carbon Tax")
"If it has to be a market solution," Böhm said, then there must be the political will to set a very tough cap. "But if you do that, you effectively have a carbon tax, which is why Europe's cap was not all that tough." He's also dismayed that California's plan accepts international credits. CDMs, he said, lead to "creative accounting" and not effective reductions in emissions. It is better, he said, to keep markets local. (Related Interactive: "World Electricity Mix")
Its real injustice for European industries to play economic politics especially in the case of carbon cap which would have help reduce not only pollution but death rate to such satanic gas. Am not surprise though because European industries only want to make money and control developing countries.
Its so sad when the readers are way ahead of the editors. Pathetic! Get up to date.
*Occupywallstreet does not even mention CO2 in its list of demands because of the bank-funded carbon trading stock markets ruled by corporations and trustworthy politicians.
27 years of "maybe" proves it "won't be" a crisis.
Not one single scientific study in 27 years has ever said a climate crisis from Human CO2 is as inevitable and eventual as an asteroid hit and the IPCC has never said it “WILL” happen, only might.
The ultimate crisis is a climate crisis and for that we need certainty not "maybe" and could be and might be and.....
Are you remaining believers ready to be mocked as Reefer Madness clowns and end of the world freaks for the history books? "Maybe" is unsustainable and someday perpetuating an exaggerated crisis for 27 years will be a war crime.
Why do we continue to try to make money on our very own survival??? This is greed, plain and simple. The best practice as far as I am concerned is to tax those companies to the point of bankruptcy if they emit dangerous fumes into the air. Normal everyday people have no say in what these companies are putting into the air that they breathe. So why should money be involved at all ??? Human;s are seriously losing their humanity and conscience in the name of the all mighty dollar. Sad but it will never ever work anywhere on earth.
Explaining carbon trading and why it matters can be difficult. So, you've done a good service in publishing this piece.However, I take issue with the unsubstantiated remarks made regarding the
Kyoto Protocol’s clean development mechanism (CDM). The CDM has stringent,
multi-stage processes in place, with third-party oversight to ensure that
emission reductions generated by projects are real, measurable, verifiable
and additional to what would have otherwise occurred.
California's plan to accept international and not just local carbon credits
makes sense as the point of carbon markets is to identify the most
cost-effective ways to reduce emissions. From an atmospheric perspective,
it does not matter whether emissions are reduced in one country or another:
what matters is that emissions are capped and decline over time.
In this context, the CDM has been a remarkably successful policy tool. It
has reduced over 1.2 billion tonnes of emissions in developing countries,
with over 6,700 projects in 85 countries, and has mobilized some US$215
billion in investment.
David Abbass, Sustainable Development Mechanisms programme, UNFCCC
Read the opinion of the European Wind Energy Association in this blog entitled: EU climate policy in crisis after MEP's vote
This article misses the crucial point that current European policy works wonderfully. Taxes would be a terrible substitute.
During recessions, energy is cheap because carbon credits go down. That is wonderful for freeing up the money people and companies need in tough economic times.
Carbon is expensive when the economy is booming. That's when people can afford to pay for it.
Since companies plan for continuing expanlsion, the high cost of carbon credits during booms will motivate them to be carbon efficient, and not plan on a recession to make credits cheap. That will just be a bonus that makes the recession shorter and less harsh.
Enough already - who is being taken in by this anymore? There has been almost 17 years with no significant warming. The jig is up. Give us some honest science and some honest reporting.
If the very thought and possibility that climate change could have been exaggerated makes you disappointed. …………………who’s the neocon here again? A headline is good enough for you to issue CO2 death threats to your own children?
Here is proof of exaggeration: Find me one scientific journal that says a crisis is as inevitable as they say asteroid hits are inevitable and eventual! This is good news for real planet lovers.
Climate change is not as real as an asteroid hit is, according to science through 27 years of intense research mostly into effects not causes.
27 years of “maybe” proves it “won’t be”.
Help my planet could be on fire maybe and likely and could be and……..not good enough to threaten our kids with the greenhouse gas ovens of a catastrophic climate change crisis “exaggeration”.
@Paul M. exactly. sort of like DDT might be killing off the birds, the ozone hole might be caused by CFCs, cigarettes might cause cancer, ford pintos might explode if rear ended, lead and mercury might be harmful in small doses, etc. etc.
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