The European Union became a pioneer in tackling climate change by starting the first major cap-and-trade system designed to reduce carbon-dioxide emissions by putting a price on them. But analysts are increasingly worried that technical mistakes, Europe’s prolonged recession and the failure of policy makers to strengthen the system is undermining its effectiveness.
Like all such systems, Europe’s program caps the overall emissions that power plants, steel mills and other industries can put into atmosphere. The cap, which is regulated through permits, declines every year, forcing businesses to become more efficient or buy permits from another firm or on the open market.
Recently, the price of permits has collapsed to less than 4 euros (around $5.25) per ton of carbon, down from nearly 30 euros in 2008. This is troubling because the low price discourages emitters investing in climate-friendly technologies and fuels. ...
In addition to its trading scheme, Europe has made real progress in dealing with climate change through policies encouraging energy efficiency and renewable sources of power like wind and solar. But nothing would do more to drive down emissions than putting a meaningful price on them, either through a carbon tax or through a cap-and-trade system. Europe’s job is to put that system on a sounder footing to make sure it doesn’t undo the real progress it has made.
I like the way the editorial ends, with a carbon tax and cap-and-trade as substitutes with plusses and minuses. And actually, a quick review of the regulating prices vs. quantities literature suggests that hybrid approaches might be preferred (e.g., cap-and-trade with a trigger price). It is only the naive who think a carbon tax would magically avoid implementation problems. And note, permit auctions can generate government revenue.