Europe's Carbon Cutting at a Crossroads

Once at the cutting edge of climate policy, Europe is at a crossroads. The European Union’s Emissions Trading System, established in 2005 as groundbreaking market driven approach aimed at reducing carbon pollution by requiring utilities, power plants and industrial facilities to pay for their emissions, is now teetering on the edge of irrelevance. At its peak, allowances - the equivalent of one metric ton of carbon dioxide - were being traded at nearly 40 euros which in turn was forcing industry to invest heavily in energy efficiency and clean, renewable power generation, like wind and solar, to reduce or offset its carbon input and therefore avoid having to pay a premium on the allowance market. Those days are long gone.

In April, allowances were as trading for as little as $3.90 or ten percent of their 2008 value. With prices that low, there is no incentive for industry to take any action to cut back on emissions. In fact, even in the face of a glut of natural gas production, the use of coal fired generation increased in Europe last year with Britain leading the way upping its coal usage by 30%. The uncertain future of the carbon market has also begun to stifle investment in the once booming renewable energy sector.   

Two main factors have forced the carbon market into a free fall. The collapse and continued fragility of the European economy has reduced industrial productivity and power use to levels well below where the associated pollutants would breach the Emissions Trading System’s overall cap, meaning many polluters have no need to participate in the market.  Then there is the cap itself. When the program was set up, the amount allowances needed was grossly overestimated and the cap was set at a level that is much higher than the amount of carbon currently being produced. The oversupply of credits has and will continue to suppress prices.

This problem can be fixed if Europe’s leaders could only muster up the political courage to act. Last month, the European Parliament blocked a measure that would have increased allowance prices by lowering the carbon cap. I suggest they take a look across the pond for leadership on this issue (and I don’t mean Congress). When faced with very similar circumstances – a stalled economy and an inflated cap on carbon – the nine northeastern states that form the Regional Greenhouse Gas Initiate (RGGI) moved to right-size their cap and mandate annual reductions going forward. When the lower cap goes into effect next year, it will drive up the price of allowances which will generate increased revenues the states will then use to invest in the clean energy economy.

Europe should learn from its recent past, when its carbon markets were thriving and they were leading the world in green economic growth.  The proven job benefits coupled avoided costs associated with climate pollution should be enough reason to take another shot at reducing the cap and setting the emissions back on track.