No one questions the very existence of stock markets when prices rise or fall. Not so for carbon markets. In April, prices in the EU’s emissions trading scheme fell to record lows of below €3 a tonne of carbon dioxide, after an unsuccessful vote in the European parliament to prop up prices. Observers wrote obituaries.
Earlier this month, in its second vote, the parliament approved a plan to “backload” carbon allowances and, thus, limit supply temporarily. Prices rose, though barely above €4, far below its high of above €30 five years ago. But while the price has grabbed the headlines, it is fundamentally the wrong focus. It also detracts from the fact that the ETS has succeeded at its most important job: cutting pollution.
Carbon emissions under the ETS are down by more than 10 per cent. And because the EU has established a mandatory declining cap, emissions will continue to go down by 1.74 per cent a year, every year – even if politicians take no further action. That path achieves about 70 per cent reductions below 1990 levels by 2050. ...
None of that means the cap should not be tightened further. That is exactly the opportunity low carbon prices provide. However, the goal of the ETS is not to make emissions costly, but to make them scarce. The price is only a means to an end. ...
The beauty of the market approach is that it provides a powerful incentive for cost-saving innovation, pushing prices down – without the need for governments to pick the technologies that are best at reducing emissions. That is what happened with reducing chlorofluorocarbons under the Montreal protocol, getting lead out of gasoline and cutting sulphur dioxide from smoke stacks. And that is what will happen when we cap carbon emissions around the world.
I found this on the internet. Here is the link but it is fairly useless since the Financial Times has the gall to ask you to pay for content. Luckily for me, I am a member of the Land and Resource Economics Network (i.e., the RESECON listserv [remember those?]) and the authors emailed it there.
I tend to agree with the sentiment of the article, it is the pollution reduction that matters, but for cap-and-trade to work, it seems like the trading mechanism should be more stable than the EU's. No one questions the existence of the stock market when prices fall, sure, but when prices crash a lot of people lose money, people buy cash and commodities and the real economy doesn't work as well as it usually does. Falling pollution doesn't hide the fact that something stinks about EU cap-and-trade and that it could be improved.