Reducing the supply of permits will raise the price and maintain the incentive to cut emissions further
The Age, the Australian daily paper, 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 demand and supply diagram clearly shows that theory of the EU carbon trading market works and that hopefully if the EU does act and buy up the surplus permits it will continue to work, reducing CO2 emissions even further by moving supply further to the left. Australia’s daily newspaper seems to have totally missed the point; sales of the permits means that an active effort to reduce emissions is taking place and those that are making this effort are rewarded by being able to sell the permits. Australia also seem very keen to sit back and watch everyone else, criticising (incorrectly) whilst doing very little towards reducing the problem.
ReplyDeleteIt is suggested in the article that reducing carbon emissions has, perhaps, been put to one side, which seems strange as it is a worldwide issue that can be substantially helped by a combination of the successful implementing and maintaining of carbon permits along with congestion charges and alternative fuels that produce less or no CO2 etc.
Grace Nicolle