It has been a very rocky week on the carbon dioxide market. A fortnight ago, carbon dioxide was selling at €30 a tonne, but last Friday the price had plummeted to €9 a tonne. Since then, the price has stabilised at around €15. Nevertheless, this sudden panic has resulted in concern about the stability of what had been heralded as the new wonder commodity, and more seriously still, has brought into question the effectiveness of the European Union’s flagship policy to cut EU emissions. The crisis was caused when the EU accidentally released data on Friday that showed that member states had actually produced less CO2 than had been expected. This meant that there were too many carbon trading permits floating around and hence the crash in the value of carbon. At a basic level, it is the EU that is to blame for this mess and they need to think about what their role is to be, if they are to prevent similar events in the future.
The CO2 trading system is based on giving each carbon emitting company a quota for how much CO2 a company can produce. If a company wants to produce more CO2 then it must buy a quota from a less polluting company. The idea is that this cost will encourage companies to invest in pollution reducing technologies rather than permits. At the moment everyone is blaming everyone else for the way in which the programme has gone amiss. Much of the blame has been heaped on national governments for being too generous in the allocation of permits. Yet some blame must also rest with the EU. Although responsibility for implementing this policy was given to member states individually, at a fundamental level, this was an EU-wide policy. There are strong arguments for making environmental policy an EU level issue – principally that pollution and global warming are none to concerned about national boundaries. So, if member states failed to give out the correct number of emissions permits or over-estimated how much pollution would be produced, then the EU should have been on their backs to ensure that they corrected their errors.
Instead, the initial response of the EU was to unleash a diversionary barrage of spin – hailing the lower than expected emissions as good news! Does anyone really think that we will fall for that? While EU companies did produce less CO2 than expected, this was only because someone had messed up the calculations. And by doing this, they have undermined trust in what is potentially a very promising contribution to attempts to reduce global warming. There is an argument to say that the reason for this mess is that actually reduction efforts have been too successful and that companies have cut their emissions more than envisaged. But environmental activists are very sceptical about this explanation, instead suggesting that big polluters have put pressure on government to go easy on quotas. Knowing the force of the Brussels lobby, this seems a more likely description of events. The EU will operate best if it acts as an effective regulator and not as part of the political maelstrom of spin, lobbying and cover-up. If it had pursued this role more effectively here, perhaps we would not now have to listen to talk of whether carbon trading can be salvaged.