"Carbon Trading on the Cheap"

"The European Union's Emission Trading System, which has been in place since 2005, puts a price on carbon dioxide pollution for the purpose of inducing industry to cut emissions of greenhouse gases and reduce the effects of climate change. While other governments and authorities (including a consortium of U.S. states) are experimenting with carbon trading, Europe's system accounts for more than three-quarters of such trading on a global scale. The trade in EUAs has amounted to more than 140 billion euros ($196 billion).

Yet Europe has vanishingly little to show for all this. In theory, limiting the supply of the pollution allowances helps to establish a price for the emission of carbon dioxide. That, in turn, is meant to provide industrial manufacturers and power producers with financial incentives to develop cleaner technologies. The reality has played out very differently, however. A glut of pollution credits, distributed without cost during both the first, transitional phase of the program and the current working phase, drove down the value of the EUAs. As a result, Europe's carbon dioxide emissions remain priced well below 20 euros per ton.

With the price of pollution so low, economists say, industries that generate and consume energy have no incentives to change their habits; it is still cheaper to use fossil fuels than to switch to technologies that pollute less. 'It is hard to tell if any investment decision in the last three to four years has really been shaped by the carbon price,' says Sophie Galharret, an energy economist with the French-Belgian power utility GDF Suez and a research fellow studying European energy and climate markets at Sciences Po, France's elite university of political science and economics in Paris. 'The perfect market should provide such incentives,' says ­Galharret, 'but today's real market does not.'"

Peter Fairley reports for IEEE Spectrum July 1, 2009.

Source: IEEE Spectrum, 07/02/2009