“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.
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.