An attempt to fix European carbon trading

Carbon trading: The first hurdle | The Economist

EUROPE’S emissions-trading system, the world’s largest carbon cap-and-trade scheme, survived a near-death experience on February 19th. The environment committee of the European Parliament voted to support a plan proposed by the European Commission, the European Union’s executive arm, to take 900m tonnes of carbon allowances off the market for up to five years. Had it rejected the plan, the market might have collapsed.

The proposal would reduce some of the massive overcapacity in the ETS, which has driven the price of carbon down from almost €30 a tonne in 2008 to about €5 this year. As this article argues, the overcapacity has come about as a result of two things: recession (which has pushed down industrial demand for carbon, even though the volume of carbon allowances is fixed for 2013-20) and one-off factors such as an increase in the number of carbon auctions. By taking allowances off the market now, when prices are low, and reintroducing them later, when (the proposers hope) prices will be higher, the designers of the scheme hope to limit the price decline. In the first instance, that hope was not fulfilled. Prices fell to €4 a tonne after the vote.

A recovery in the price may well help the Gillard government sell its scheme.