Europe Seeks Ways to Raise the Price of Carbon

by | Feb 20, 2017

When Europe designed its program to limit the level of carbon emissions in 2005, it allocated too many credits and it set the price of a ton of carbon too low. Companies were thus motivated to buy credits, which were cheaper than newer technologies.

A piece in Bloomberg underscores that point — that its Emissions Trading System (ETS) has failed to do its job. Why’s that’s? The price of a ton of carbon should be $30 but it is now at $5.29.

“The cap was set, and has remained, far too high,” says the column. “Free allowances were handed out generously. And when the financial crisis hit, industrial production fell, turning a surplus of emissions allowances into a glut. While the ETS has brought about a modest decrease in emissions, its low carbon price discouraged the kind of widespread shift to clean technology the system was meant to drive.”

Cap-and-trade works like this: Governments set pollution limits and then credits are either auctioned or allocated to industry. Those companies that are able to exceed the expectations can either bank their allowances for future use or sell them to other businesses that are unable to meet their obligations. As the ceilings come down, overall emissions then fall.

In Europe, policymakers have delayed auctioning new permits to reduce the supply and therefore raise the price of a ton of a carbon. And last week, the European Parliament said it would substantially reduce the number of permits now allowed on the market — but this would wait until 2020. The goal is to get the price up to $25 a ton, Bloomberg says.

The EU has set a goal to cut greenhouse gas emissions by 40% by 30. It has remained committed to the effort, even though the United States under its new president has said it will reconsider the obligations set by the Obama administration: 32% percent cuts in carbon by 2030.

Under the Clean Power Plan that is now in the courts, industries here could trade credits between and among each other to help them reach their goals. Meantime, some Republican statesmen are suggesting a carbon tax that sets a defined price on a ton of carbon as opposed to letting markets determine what that threshold will be.

As for the US, it is on target to reach its carbon objectives set by the Obama White House mainly by switching out older coal plants for those that run on natural gas and renewables. Europe doesn’t have the plethora of readily available shale gas reserves as does the US and debate is sharp there is to exact role that renewables and nuclear power will have

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