Without transparency, Europe's carbon market reform will fail

von Dr. Peter Nagel

● By Luca Taschini, London School of Economics and Josh Gregory, Imperial College London ●

In 2008, the European carbon market crashed. Carbon emission allowances in the EU Emissions Trading System (ETS) plunged from €30 per tonne of C02 in June 2008 to €7 at the beginning of 2009. Prices have fluctuated around €5 ever since.

There is broad consensus on why the price remains low. Partly, it is due to the recession: lower industrial output means less demand for allowances. At the same time, other environmental policies (such as renewable energy and energy efficiency) have been promoted, and this has confused the market. Overarching these factors are the short-term approach to decision making taken by most businesses, which makes it difficult to promote the long-term benefits of environmental investment, and general uncertainty about EU and international emission targets.

But is the low price a problem? The answer depends on how you view the objectives of the scheme.

Some see the emissions trading as a mechanism established purely to reduce greenhouse gas emissions over time at the lowest possible cost. From this perspective, the current low price is due to the interplay of supply and demand, and there is no need for intervention.

Others think the scheme should also provide a clear price signal to support technological innovation. In other words, the carbon price must be high enough to discourage large investments that lock in companies to highly polluting, high-carbon technologies for decades to come. Instead, companies would be encouraged to invest early in low carbon technologies. From this point of view, the current low price is a problem that must be fixed.

Spanners in the works

The debate around emissions trading reform has become polarised and political ...

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