Low Carbon Prices Impede Green Investments

Drop in carbon prices (€)
Drop in carbon prices (€)
Point Carbon
The price of carbon permits closed at a record low of US$13.94 today in the European Union Emission Trading Scheme (EU ETS), down from a peak of about $39 last summer. This price collapse removes incentives for industries to invest in low-carbon options such as energy efficiency or renewables.

The goal of a carbon trading scheme is to provide economic incentives to reduce emissions of greenhouse gases.  Industries are given or, ideally, buy allowances to pollute. If a company intends to emit more than its allowance, it must buy credits from those who pollute less. If the price for allowances is high, then a company may decide it's more cost effective to reduce emissions than purchase additional allowances.  But when prices are so cheap, the incentive to become cleaner and greener is lost.

The volatility of prices in cap-and-trade schemes creates huge uncertainties for businesses and investors and reduces the schemes’ ability to deliver on emissions reductions. In this case the collapse in the price of carbon has been attributed to the recession. Factories are producing (and therefore polluting) less, so companies are dumping their allowances onto the market. Emissions fall temporarily, but industries have not cleaned up their act.

Let's hope that Congress is paying attention to these issues as it considers the possibility of developing a cap-and-trade scheme in the US.  The planet can't afford another scheme, that like the EU’s, doesn't deliver true emission reductions.