Europe’s “industrial revolution” starts with Econ 101

Last week, the Economonitor noted that the European market for CO2 emissions had gone from a high of €31 per tonne in April to just €4.75. These prices are for the emissions trading scheme that allows countries and firms to trade their carbon emission allowances on the free market. Firms will invest to reduce their emissions, ...

605030_carbon5.jpeg
605030_carbon5.jpeg

Last week, the Economonitor noted that the European market for CO2 emissions had gone from a high of €31 per tonne in April to just €4.75. These prices are for the emissions trading scheme that allows countries and firms to trade their carbon emission allowances on the free market. Firms will invest to reduce their emissions, the theory goes, not only to avoid penalties for exceeding their allowance, but also to sell credits to others who can't easily afford a reduction. Similar cap and trade schemes have worked brilliantly elsewhere.

So, what's with the price plunge? A glut of credits on the market. Too many credits were allocated when the scheme began in 2005, so countries and firms are easily meeting their allowances with the credits available. Hence they have little need to buy extra credits on the open market, and the price keeps falling. Firms thus can't profit by lowering their emissions, either. With European countries already objecting to plans to cut credits in the next phase of trading slated to begin in 2008, the system looks unlikely to be the silver bullet it was intended to be. 

That's why the EU's latest announcement calling for an "industrial revolution" to cut greenhouse gases should be viewed with extreme skepticism. If they can't get the economics right, the reductions in emissions won't follow.

Last week, the Economonitor noted that the European market for CO2 emissions had gone from a high of €31 per tonne in April to just €4.75. These prices are for the emissions trading scheme that allows countries and firms to trade their carbon emission allowances on the free market. Firms will invest to reduce their emissions, the theory goes, not only to avoid penalties for exceeding their allowance, but also to sell credits to others who can’t easily afford a reduction. Similar cap and trade schemes have worked brilliantly elsewhere.

So, what’s with the price plunge? A glut of credits on the market. Too many credits were allocated when the scheme began in 2005, so countries and firms are easily meeting their allowances with the credits available. Hence they have little need to buy extra credits on the open market, and the price keeps falling. Firms thus can’t profit by lowering their emissions, either. With European countries already objecting to plans to cut credits in the next phase of trading slated to begin in 2008, the system looks unlikely to be the silver bullet it was intended to be. 

That’s why the EU’s latest announcement calling for an “industrial revolution” to cut greenhouse gases should be viewed with extreme skepticism. If they can’t get the economics right, the reductions in emissions won’t follow.

Carolyn O'Hara is a senior editor at Foreign Policy.

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