European cap-and-trade system slides into 'near meaninglessness'
The Kansas City Star
A cap-and-trade system is supposed to use market mechanisms to reduce pollution. The government issues emission permits, or carbon allowances, which trade in a market. Industries with big carbon footprints have to buy more credits, but they know that if they cut their emissions they will need fewer allowances. In theory, the system creates a strong incentive to reduce pollution.
But in practice, it’s devilishly tough to get politics out of the deal. Why? You can never have a completely free market in something for which government exclusively controls supply.
Der Spiegal, the German magazine, says that carbon prices in Europe’s Emissions Trading System have fallen so low the system has become “mostly useless,” and has slid into “near meaninglessness.”
Europe’s can-and-trade system was supposed to be moving into its “crucial third phase,” in which the number of carbon credits was to be scaled back, boosting the price of carbon allowances — and boosting incentives to pollute less. But doing that would also raise energy prices at a time when many European economies are barely treading water.
The sluggish economy, with diminished production, is a big reason the price of carbon credits has fallen. Recently, Germany cancelled an auction of credits because, for the first time, zero bids came in at the minimum price.
Another reason for the low prices is that too many credits were issued in the early years of the program.
The ETS highlights the reality that cap-and-trade systems are vulnerable to favoritism, finagling and poor planning by bureaucrats. Favored sectors may get many of the early credits, and the supply is always subject to political influence, as Europe shows.
If you’re going whack C02 emissions with a tax, it’s best to apply a straight-on, revenue-neutral carbon tax — and use the revenue to lower taxes that impede jobs and growth, like the payroll tax or the cap gains levy.