EU emission trading in trouble

This week’s Economist on the EU Emission Trading Scheme,

Last year, governments gave away (ie, did not sell) pollution permits that amounted to more than the pollution companies were actually spewing forth. That risks making the scheme pointless. The European Commission is now reviewing proposals for allocations in 2008-12. If approved, these would allow companies to increase emissions by a further 15%.

Lax allocations do more than just fail to cut greenhouse gases (bad enough, you might think, given that this is the main point of the scheme). They also damage the market. When it became clear, in April, that most allocations were larger than actual emissions, the price of carbon halved almost overnight…

It gets worse. The plunging price sends a market signal to developing countries that have installed pollution controls partly so that they could sell the resulting “pollution credits” for a nice profit. That no longer looks like a good idea…

Similarly, some countries (Germany, France and Poland) have scattered permits around like confetti while a few (Britain, Ireland and Spain) have been sparing because they want to cut emissions. Companies in the second group are buying permits issued in the first, so the market is transferring resources from places that are using the scheme to curb pollution to those that are not. Brilliant.

Presiding over this mess is the EU Commissioner for the Environment, Stavros Dimas.

The Economist quotes Michael Grubb, who makes a sensible suggestion,

The European Commission could reject the proposed national allocations outright and insist that offending governments slash the allowances substantially. They could also push governments to sell the permits, rather than give them away (taxpayers would like that too). But in the long run, argues Michael Grubb of Cambridge University, countries need independent agencies to issue the permits, just as there are independent central banks to issue money.

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