The UK government and green groups have welcomed a European Parliament move to rescue the EU's carbon trading scheme, but say deeper reforms are needed.
MEPs backed a European Commission plan to freeze the auctioning of some carbon dioxide (CO2) emission allowances.
The idea is to reduce the current oversupply of allowances, thereby pushing up the carbon price.
Carbon trading gives heavy industry an incentive to cut CO2 emissions, which have been linked to global warming.
The parliament voted on Wednesday to let the Commission delay the auctioning of up to 900 million CO2 allowances.
The plan still has to be agreed with EU governments to take effect, and Poland - heavily dependent on carbon-rich coal - is among several countries that oppose it.
One possible solution to low carbon prices caused by oversupply of carbon permits is to ask society to 'put their money where their mouth is.'
If we as a society care about reducing carbon emissions, then we as individuals should be willing to buy permits to benefit ourselves...right?
If each person buys permits according to their own willingness to pay, then the socially 'right' number of permits will be available for carbon emitters to buy....right?
But in reality, this won't (and can't) work. While some individuals have a demand for permits (carbon reductions), and in aggregate this represents a social demand for carbon reductions, the individual incentive to buy permits is screwed up because of the public nature of the benefits from carbon reduction.
In a well functioning market, when I buy a candy bar, I get the benefits from buying the candy bar, and others have to forgo those benefits (nanny-nanny-boo-boo). But with a carbon permit, if I buy a ton of carbon and retire it (prevent someone from emitting it) you get the benefits of my purchase too...and vice-versa.
Well, if I can benefit without paying, why shouldn't I (other than being a nice guy and doing the right thing and all that touchy-feely nonsense)? And if others think like I do--and really, shouldn't everyone think like I do?--then the market will fail to create the incentives for society to buy the 'right' number of permits...
...and there will be too many permits on the market.
...and the price of permits will be too low.
...and the amount of carbon produced will be higher than is socially optimal.
So how do we fix the market problem so that the market will work like a market should work? We estimate the social cost of carbon and we target/allocate the number of permits to achieve that price.
Sort of like Europe is trying to do with the 20 euro per tonne target.
But politics keep getting in the way.