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What Doesn’t Kill You: Cap-and-Trade Endures

| Tuesday April 13th, 2010 | 0 Comments

Like global warming, cap-and-trade isn’t going away. The trading system in place in Europe has managed to survive a series of scandals in the last year or so, and the price of a permit to emit one metric ton of carbon has been rising steadily for the last month — despite an oversupply due to the recession.

And in the United States, “cap-and-tax” may be a political hot potato, but some form of market mechanism — cap-and-trade by another name — will likely be in the Kerry-Graham-Lieberman energy bill expected soon.

In the last week, both the New York Times and Financial Times pointed out the fundamental healthiness of the European system. The Times post, “Don’t Think that Cap-and-Trade Is Over” is especially intruiging, given that it comes barely two weeks after an article in that paper entitled “The Demise of Cap-and-Trade.” Apparently, its demise has been greatly exaggerated.

A no good very bad year

A slew of criminal investigations involving tax evasion and the “recycling” of carbon permits by the government of Hungary, dealt serious blows to the credibility of the European carbon trading system, which is less than a decade old and entirely reliant on political will for existence.

Then there was Nopenhagen and “climategate.”

The recession also caused problems. Emissions were down 11 percent last year, due not to carbon mitigation strategies but simply economic slowing. The result was companies, who are allocated a certain amount of carbon permits by EU each year, had more than they needed by the end of the year. Analyists feared this would lead to a free-fall in the price of carbon permits.

Instead, the price has gone up slightly, and is now trading at around €13.70, according to Point Carbon. The rise reflects both an expectation that emissions would be lower than they were — and anticipation of the future value of the credits, according to the Financial Times, a sign of confidence in the five-year old system’s resilience.

A potential money maker

The Times Green Inc. post cribs from a working paper issued by the European Commission to suggest carbon trading could be a financial boon for governments looking for revenue in tight times. According to the Times, European Union member states could earn €26 billion selling carbon credits to various industries by 2020.

The same paper suggests the US government could make $8 billion a year under the system that is part of the Waxman-Markey bill.

Of course that money doesn’t just materialize out of thin air — it comes from private enterprise, paying to pollute. Presumably at least part of that cost would then be passed on to consumers.

Still the best way?

While there has been a lot of talk of replacing cap-and-trade with a carbon tax — a flat fee on each ton of carbon emitted — evidence suggests a market-based solution can be extraordinarily effective.

Writing in the New York Times magazine last weekend, Paul Krugman explained how a cap-and-trade market for sulfur-dioxide in the 1990s cut emissions of sulfur-dioxide from power plants by almost half.

So far it’s the only example of cap-and-trade in the US, and it worked really well.


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