By Emil Dimantchev
In mid-December, the European Parliament approved a measure to support the European carbon price. Following two years of discussions and an initial rejection of the proposal, lawmakers reached a broad majority in support of the so called ‘backloading’ plan. This will now allow the EU executive to temporarily withdraw emission permits from the market. Dubbed “a turning point for the market” by legislators and “a confidence boost” by analysts, the move will likely help revive the European carbon market, at least in the short term.
Having taken action to boost carbon prices, policy makers reaffirm their backing for carbon trading as a climate policy instrument. Participants in the EU ETS now have more confidence that the market will continue to operate as a key EU policy rather than be discarded as a failed experiment. A higher certainty for the continuation of the scheme will probably have an impact on investment decisions as well, although one that is difficult to quantify. Backloading therefore supports the market in the short term, buying time for policy makers to make structural amendments to the EU carbon market.
The measures implemented in Europe and RGGI exemplify that the common carbon tax vs. cap-and-trade debate is a false dichotomy. Policy makers can put a price on carbon, which is determined by a market, but not allowed to deviate beyond desired ranges. California adopted this concept by incorporating price floors and price ceilings in the design of its carbon market. In the EU, the debate will continue on how to implement long lasting structural reform of the carbon market. Currently, one of the front-running options is to put in place a flexible supply mechanism which can adjust supply depending on changes in demand.
These changes reflect the evolution of carbon markets. Putting a price on carbon may not only be about reducing emissions at the least cost anymore. By managing supply, regulators can use carbon markets to send price signals that help incentivize energy markets along the path of decarbonization.
Emil Dimantchev is a carbon market analyst at Thomson Reuters Point Carbon. The views expressed in this article are his own, unless stated otherwise. Follow Emil on Twitter.
Photo Credit: FMJ Shooter, Flickr