The Carbon Market Has a Dirty Little Secret
Europe's flawed cap-and-trade system actually seems to encourage pollution
The law of unintended consequences has struck again.
Two years ago, the European Union created a market to control carbon dioxide emissions by setting a cap, then issuing tradable "allowances." But those chits are now trading for pennies on the dollar. It's become so cheap to emit greenhouse gas that it now pays to burn more dirty fossil fuel than less. Along the way, millions of dollars have been spent on projects of questionable environmental value.
"I think the experience in Europe has demonstrated that cap and trade may in fact not work at all," Rep. John Shadegg, an Arizona Republican, noted at a recent hearing.
Unreal limits. Advocates of a market-based approach insist it can be effective-and would be more politically palatable than alternatives such as a carbon tax-as long as the United States is careful to avoid Europe's missteps. One of the biggest: Nations were too generous with their industries in initially handing out carbon emission allowances. Too much supply drove down the price of pollution to less than 80 cents per ton as of last week. Futures trading on the market suggests the price will recover when a second, more stringent program phase begins in 2008. But even if values recover, controversy is likely to persist over the environmental value of the carbon-reduction projects the system has spawned in China and elsewhere in the developing world. It's a cheap way for companies and countries to earn new tradable carbon allowances; some wonder whether there's sufficient proof that the activity is helping head off climate change.
Dallas Burtraw, a senior fellow at Resources for the Future, argues that simple rules and credible monitoring and enforcement are essential to creating a carbon market that works better. "I have great respect for what happened in Europe, and they put together a program at a breakneck pace that is of historic magnitude," he recently told Congress. "But they had to make some decisions in doing so that I think we would not want to replicate here."
This story appears in the May 14, 2007 print edition of U.S. News & World Report.