Editorial Board

Europe Needs a Higher Price on Carbon

The EU’s emissions trading system can’t work if it keeps handing out too many permits.

Fire away.

Photographer: Lukas Schulze/Getty Images

Europe’s promise to lower greenhouse-gas emissions looked bright a dozen years ago, when its leaders created the first big market for trading carbon permits. Sadly, though, its system has failed to encourage investment in clean technology and appreciably lower carbon dioxide emissions. Until the European Union trims the number of permits traded enough to drastically raise the cost of emitting carbon dioxide, its market will remain dysfunctional.

The idea behind the Emissions Trading System was simple: Cap the total amount of greenhouse gases each industry can emit, let companies receive or buy allowances according to their needs, and lower the cap over time. The price of carbon would gradually rise, nudging companies to invest in cleaner energy.

It didn’t work out that way, however. The cap was set, and has remained, far too high. Free allowances were handed out generously. And when the financial crisis hit, industrial production fell, turning a surplus of emissions allowances into a glut. While the ETS has brought about a modest decrease in emissions, its low carbon price discouraged the kind of widespread shift to clean technology the system was meant to drive.

Experts say that, to make a difference, the price of carbon dioxide should be about $30 a ton today, rising by roughly 5 percent a year. Today in Europe, the price is down to about five euros ($5.29).

Tinkering with the system hasn’t worked. In 2015, auctions of new permits were postponed to reduce the overflow, but this didn't help much.

Last week the European Parliament passed a set of reforms to take effect after 2020, one of which would double the number of permits to be taken off the market. This could push the carbon price up to 25 euros a ton by 2020, according Bloomberg New Energy Finance. But first the reforms will need to survive the EU’s legislative process.

The EU has set a goal to reduce greenhouse gas emissions 40 percent by 2030. If it can’t make the emissions-trading system work, then member states will have to find alternatives. The U.K.’s floor on the price of carbon emissions -- 18 pounds ($22.35) per ton -- will put all its coal-fired power plants out of business. France announced a price floor last year, and other countries may need to follow suit.

There’s no reason market forces can’t work to lower emissions. But without a high enough price on carbon, a permit-trading system has no force to bear.

    --Editors: Therese Raphael, Mary Duenwald

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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