Another Euromess casualty: Europe’s climate policy

at 02:07 PM ET, 12/23/2011

“Without intervention … Europe’s climate policy is over. It will put Europe back in the dark ages.” That’s energy analyst Sanjeev Kumar commenting on one of the lesser-discussed victims of the euro crisis — namely, that Europe’s cap-and-trade system for heat-trapping greenhouse gases is on the verge of collapse, thanks to flawed design, low permit prices and a brutal recession.


A gas storage tank in London. (Matthew Lloyd/Bloomberg)
For a short period, there was good evidence that Europe’s cap-and-trade program — under which overall carbon-dioxide emissions are capped and companies buy up pollution permits from a steadily shrinking pool — was working. Back in 2009, the EU-15 looked on track to meet its climate emissions goals under the Kyoto Protocol, thanks to the cap. But after economic crisis after economic crisis tore through Europe in the past few years, energy demand dropped, and there were far more pollution permits lying around than companies needed. That caused the price of emitting carbon to plummet, which means there was considerably less incentive under the program for polluters to invest in clean energy or efficiency upgrades.

To rectify the problem, the European Parliament is now trying to pare back the number of permits that are issued, but prices have plunged 50 percent. What’s more, the EU recently passed a sweeping new energy-efficiency law which could drop electricity demand further and put fresh downward pressure on prices. Now, from a climate perspective, that doesn’t necessarily make much difference — if carbon pollution is dropping, it doesn’t necessarily matter why it’s dropping — but the price plunge means the program could have to be redesigned to avoid imploding altogether.

Europe’s experience also highlights one key difference between cap-and-trade and a carbon tax. During a recession, energy use and carbon emissions tend to fall. Under a cap-and-trade system, then, the price that companies pay to pollute would also drop, providing a form of economic stimulus. (Overall pollution shouldn’t rise, because the cap on overall pollution is still in place.) But that price lurch can also make it more difficult for companies to plan longer-term investments in clean energy. Under a carbon tax, by contrast, there’s no built-in reprieve during a downturn, but the energy price signal also stays more or less constant.

 
Read what others are saying

    Most Read: Business

    DJIA
    -1.45%
    NASDAQ
    -1.03%
     Last Update: : AM 01/31/2015(NASDAQ&DJIA) |

    World Markets from      

     

    Other Market Data from      

     

    Key Rates from