Europe’s carbon market, a pioneering effort to use markets to regulate greenhouse gases, is having a hard time staying upright. This year has been stomach-churning for the people who make their living in the arcane world of trading emissions permits. The most recent volatility comes on top of years of uncertainty during which prices have fluctuated from $40 to nearly zero for the right to emit one ton of carbon dioxide.
More important, though, than lost jobs and diminished payouts for traders and bankers, the penny ante price of carbon credits means the market is not doing its job: pushing polluters to reduce carbon emissions, which most climate scientists believe contribute to global warming.
The market for these credits, officially called European Union Allowances, or E.U.A.’s, has been both unstable and under sharp downward pressure this year because of a huge oversupply and a stream of bad political and economic news. On April 16, for instance, after the European Parliament voted down the proposed reduction in the number of credits, prices dropped about 50 percent, to 2.63 euros from nearly 5, in 10 minutes. ...
Europe’s troubled experience with carbon trading has also discouraged efforts to establish large-scale carbon trading systems in other countries, including the United States, although California and a group of Northeastern states have set up smaller regional markets.
Traders do not mind big price swings in any market — in fact, they can make a lot of money if they play them right.
But over time, the declining prices for the credits have sapped the European market of value, legitimacy and liquidity — the ease with which the allowances can be traded — making it less attractive for financial professionals. ...
Until the end of 2012, these credits were given to companies free according to their estimated output of greenhouse gases. Policy makers wanted to jump-start the trading market and avoid higher costs for consumers.
Beginning this year, energy companies must buy an increasing proportion of their credits in national auctions. Industrial companies like steel plants will follow later this decade. ...
Over time the number of credits is meant to fall gradually, theoretically raising prices and cutting pollution.
The reality has been far different because of serious flaws in the design of the system. To win over companies and skeptical countries like Poland, which burn a lot of coal, far too many credits have been handed out.
At the same time, Europe’s debilitating economic slowdown has sharply curtailed industrial activity and reduced the Continent’s overall carbon emissions.
Steel making in Europe, for instance, has fallen about 30 percent since 2007, while new car registrations were at their lowest level last year since 1995.
Big investments in renewable energy sources like wind and solar also reduced carbon emissions, which have fallen about 10 percent in Europe since 2007.
As a result, there is a vast surplus of permits — about 800 million tons’ worth, according to Point Carbon. That has caused prices to plunge. ...
Me? It looks like government failure. Any market is going to have price fall to zero if the supply is handed out like candy at a parade. To prove my point ask yourself this: when was the last time I went to the candy store after a parade? Q.E.D.
A more useful response to the observations about Europe's carbon market is to consider what is wrong with it and how can it be fixed. Carbon taxes are prone to government failure too.