European Carbon Market Crashes

For a long time the European Union has been leading against climate change. Part of this leadership was its emission trading scheme (ETS), a cap and trade scheme that was designed to cut industrial greenhouse gas emissions.

As I noted back in 2009, the emissions trading scheme seemed to work as it had ” created a healthy carbon market now worth 56 billion US dollars, and has reduced Europe’s emissions by 50-100 million metric tons a year since 2005.”

“In other words, the cap and trade has been responsible for Europe reducing its carbon emissions by 2.5-5% annually. “

Back then, a ton of carbon was priced between 15 to 20 euros. But since then, the situation has changed for the worse. Indeed, prices have fallen from €20 ($30) a ton in 2011 to €5 a tonne in early 2013.

To save one of its key climate initiatives, the European Commission recently created a plan to take 900 million tons of carbon allowances off the market now and reintroduce them later. This was called ” backloading “.

This plan was rejected last week by the European Parliament by 334 votes against 315. Subsequently, on April 17th, the carbon price went even lower with a tiny 2.75 € a ton.

As a result of the current low carbon prices, the European Union has been burning more coal than it has done in the past. This is definitely a reason to worry as air pollution kills more than HIV and Malaria combined. The situation is so dire that up to 69 coal-fired plants could be built in Europe.

Even if the European Emission Trading Scheme is still not dead yet, this failure will have profound consequences as many other countries including Australia, South Korea, some Chinese provinces and the US State of California have similar cap and trade markets.

As the Economist notes, this failure to vote for backloading will have negative consequences on the global carbon market.

Pricing carbon is becoming more and more vital as climate change becomes an ever more serious issue. This is why several countries – including Ireland and Australia – already have their own carbon tax and more and more others – like China and South Africa – are thinking about taxing carbon in the next few years.

To conclude, reforming the EU ETS is vital if the European Union wants to keep some leadership and credibility in the fight against climate change. Setting a sufficient floor price just as California does would be a great idea. Enacting a carbon tax could be another one.

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