The financial papers this week are reeling, simply reeling, at the plummet in the EU carbon markets. The idea is that the European Trading Scheme is a failure, because the price of carbon in the European cap and trade market has bottomed at a very low price: just 7.68 euros.
But, aside from the European financial turmoil – reducing power needs – the fact that the price has dropped so low in Europe is a mark of success. It reflects the fact that it was surprisingly inexpensive to switch to clean energy to meet targets, add energy efficiency projects, and invest in clean energy projects in the developing world with the Clean Development Mechanism.
The 2009 progress report to the UN noted that the EU was likely to actually exceed its 8% below 1990 levels by 2012 target, with 2007 levels already at 5% below 1990 levels. The reduction came largely before the economic crisis at the end of 2008, and during a period of years that the EU economy grew by 44% in total.
To correlate a low carbon price with failure is to misunderstand the purpose of cap and trade. It is not designed to make fossil energy more expensive, but to reduce greenhouse gas emissions by forbidding the emission of carbon, by capping the allowed amount, and then each year, steadily ratcheting down the allowable carbon emissions. In the ETS, the overall supply of tradable allowances to emit carbon dioxide is fixed at a pre-agreed cap that was set in 2008 before the recession kicked in.
While the alternative approach, a carbon tax, discourages use of fossil fuels by making them more expensive, but does not prevent them from being used more, cap and trade is the opposite. A carbon cap will guarantee the certainty of a specific reduction in carbon emissions, while trade does nothing to prevent the price of permits from bobbing up and down, depending on how difficult and expensive it is to switch.
The low price is bad for investors, but it does not raise the allowed limit on carbon emissions.
When it gets more expensive to reduce emissions, the scarcity of permits will cause that price to rise again. Worldwide, clean energy investment may move from Europe to countries and states where the carbon costs are higher.
The UK is considering putting a floor price, below which the permit cost may not go below, to protect investors. The carbon markets that began after the European one, have mostly included a floor price in their cap and trade legislation, at least for the early years. The Regional Greenhouse Gas Initiative (RGGI) price floor is negligible at under $2, New Zealand has none, California will have a floor of $10, and the newest, Australia’s is initially set at $15.
But a look at RGGI success, suggests that the lack of a real price floor does not prevent success in the mission – which is lowering carbon emissions.
Just like Europe has already succeeded in meeting and exceeding its 2012 carbon targets – lowering the demand for permits and thus the price, RGGI states have already met and surpassed their 2018 target, according to Foley and Hoag’s Amy Boyd at Law and Environment.
RGGI’s initial aim was to cut CO2 emissions from large power plants in the 10-state region to 10% below 2005 levels by 2018. This plan involved two stages: one with the cap stabilized at 180 million tons CO2e from 2009-2014, and the second, from 2015-2018, with a cap declining by 2.5% each year.
However, in the two years that the program has been in action, emissions have already declined to 33% below 2005-levels.
As in the EU, RGGI has not cost consumers. Quite the opposite.
By 2021, consumers of electricity in the 10-state region will enjoy a net savings of nearly $1.1 billion on their electricity bills, and, due to efficiency programs focused on insulation and heating efficiency, another $174 million in savings from avoided expense on natural gas and heating oil.
And, although one Republican Governor thought the income could be used for other purposes, (Call for NJ Governor to Repay $65 Million to Carbon Fund | Reuters) and absconded from RGGI with the state’s carbon auction income, all those states got an income boost to pay for these energy efficiency and clean energy investments that lowered their residents’ energy costs and carbon footprints.
Overall, the 10 states took in $912 million from the auctions, which, when invested by the states in various programs and initiatives, added $1.6 billion in net present value to the region’s economy, even when taking into account the nearly $1.6 billion loss in income that power producers face with more efficient energy usage reducing prices and consumption.
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