The Great Debate UK

Europe’s carbon trading system needs radical reform, not stop-gap measures

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–Laurens de Vries is an assistant professor, Joern Richstein is a doctoral candidate, Emile Chappin is an assistant professor, and Gerard Dijkema is an associate professor at Delft University of Technology, the Netherlands. The opinions expressed are their own.–

The European Parliament voted on December 10 to delay sales of around 900 million carbon permits for the EU greenhouse-gas Emission Trading System (EU-ETS). The deferral (or so-called back-loading) may help correct the substantial oversupply of permits which have caused the carbon price to fall below 5 euros, a sixth of the price in 2008.

While back-loading will be welcomed by many governments and by the European Commission, the episode underlines that in its current form, the EU-ETS system is simply not fit-for-purpose. Back-loading is a one-time, ad-hoc fix that does not solve the underlying problem of the unpredictability of carbon prices. If governments give away or sell too many carbon permits, the price falls too low – as now – and there is no incentive for companies to reduce emissions.  If too few carbon permits are sold, the price may become unacceptably high, causing economic hardship.

A solution would be to implement a minimum and maximum price for carbon permits.  Such a price collar would be a far more effective tool for limiting carbon emissions, and would be more beneficial for European companies and consumers too. Polluters would have more certainty about recovering investments in emission reduction while the economy would be insulated against excessive price rises.

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