Misunderstanding carbon trading

Australians have little grasp of the concept or problems of Carbon emissions and the need to correct this market failure. In the EU the need to reduce CO2 emissions is accepted and is being tackled.

The Age has got hold of the story that the carbon price in the EU emissions trading scheme has fallen and have interpreted this as a sign that the scheme is somehow failing. It represents the deep misunderstanding of how these schemes work which is prevelant in Australia.

The report that prices have fallen while volumes traded are up 26% in 2012 shows the success of the scheme! It means that firms are reducing carbon emissions and therefore can sell their surplus permits. That is a key incentive provided by carbon trading, those who can reduce CO2 emissions are rewarded by the revenue of the permit sales.

What is required is for the EU to now withdraw, or buy up, surplus permits so that the trading price rises again. The ETS market will then provide a further incentive for firms to cut emissions even more. Here the EU is too slow to act, but this is because it tends to work in 'phases'. It would be better if the EU intervened more actively in the market to stabalize the price of permits both to maintain incentives and provide certainty for firms who need to buy or sell them.

The Age report is here