Cheap Carbon: Falling Emissions Prices Spark Debate Over Cap-and-Trade

If you're new here, you may want to subscribe to our or .

| Sourced From |

Are low prices for carbon-emissions permits a good thing?

The plunge in the price of European carbon permits has reopened a debate over the efficacy of the cap-and-trade system to curb greenhouse-gas emissions.

As the Obama administration and the Congress prepare their own cap-and-trade program this year, it’s hardly an academic debate. It basically boils down to determining which is the priority for any climate bill: guaranteeing cost-effective emissions reductions or aggressively reducing emissions regardless of the cost.

Falling prices for carbon permits, which represent a ton of carbon-dioxide emissions, are a good and natural consequence of carbon markets, say proponents, including Europe’s energy commissioner. As the economy tanks, and industrial activity declines, so do industrial emissions and thus the need for utilities and other big emitters to buy permits to cover their own emissions.

Cheaper carbon prices as a consquence of the downturn show one of the system’s most telling advantages—prices automatically adjust to make life easier on business during tough times. That makes cap-and-trade preferable to other alternatives, like a carbon tax, which would stay the same regardless of how ugly the economy gets.

Alex Rau, head of investment firm Carbon Wedge, told Bloomberg that falling carbon prices show cap-and-trade schemes can pass the “ultimate stress test” of a nasty economy.

But cheaper carbon prices do have a downside. They weaken the price signal for businesses to move away from older, dirtier energy to cleaner alternatives. They also dampen investor interest in new clean-energy projects.

If carbon prices are low enough, utilities can burn coal and buy cheap permits to comply with their emissions caps, threatening to undermine the system’s environmental goals.

Lower carbon prices also dampen the appeal for more-costly energy alternatives like wind, solar, nuclear, and clean coal because the “pollution penalty” old energy pays is smaller. This week, carbon prices rebounded slightly, though they are still far off last year’s highs.

As the U.S. gropes toward some sort of climate bill this year, that tension is going to be at the heart of the debate, as it already is in California : Will economic priorities trump environmental goals?