European Carbon Market In Trouble

Europe’s climate change mitigation program turned carbon emissions into a commodity that could be traded like gold or oil. But the once-thriving pollution trade here has turned into a carbon bust.  Carbon started as the commodity of the future, but it has now deteriorated. Under the system, 31 nations slapped emission limits on more than 11,000 companies and issued carbon credits that could be traded by firms to meet their new pollution caps. More efficient ones could sell excess carbon credits, while less efficient ones were compelled to buy more. By August 2008, the price for carbon emission credits had soared above $40 per ton — high enough to become an added incentive for some companies to increase their use of cleaner fuels, upgrade equipment and take other steps to reduce carbon footprints.

That system, however, is in deep trouble. A drastic drop in industrial activity has sharply reduced the need for companies to buy emission rights, causing a gradual fall in the price of carbon allowances since the region slipped into a multi-year economic crisis in the latter half of 2008. In recent weeks, however, the price has appeared to have entirely collapsed — falling below $4 as bickering European nations failed to agree on measures to shore up the program.

The cap-and-trade program is based on a system of carbon allowances for large emitters such as utilities and manufacturers, with some bought and others awarded for free. Companies are allowed to draw on global mitigation projects — such as planting trees in tropical rain forests — to offset a small portion of their emissions. But for the most part, they must meet targets through carbon credits issued by European authorities.

At the core of the problem is a massive oversupply of carbon allowances. Demand for carbon began to fade in the late 2000s as a recession set in and factories across Europe dramatically curbed production. But there were also built-in flaws. Unlike newer cap-and-trade programs such as the one in California, Europe’s system never established a price floor that could have prevented a market collapse. In addition, too many free allowances were given to too many companies. Some, in fact, never had to pay for allowances at all, allowing them to hoard them or even sell their carbon credits at a profit.

On April 16, the European Parliament was on the verge of temporarily tightening the supply of allowances to boost the price of carbon and shore up the ailing market. But opposition by countries led by Poland — a nation strongly dependent on heavy-emitting coal power plants — defeated the measure. The rejection sent the price of carbon plummeting to a historic low of roughly $3.60.

The price per ton in California, for instance, is above $10 — about two and half times the price in Europe.

Critics argue that the low price of carbon has removed the incentive for European companies to reduce their carbon footprints. They point to a boom in the use of cheap imported American coal in European power plants. In addition, many fear that the lack of an incentive to make more green upgrades will create a boom in emissions if and when European economies recover.  (Wash Post, 5/6/2013