Tag: carbon price

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When the cap doesn’t fit

UK Parliament’s Environmental Audit Committee has concluded that the European Emissions Trading Scheme (ETS) is not working as it should. Thanks to a total emissions cap that is too low in a time of recession, the carbon price has fallen. The result is that there is no longer sufficient of an incentive for firms to invest in green technology. As the Financial Times article (below) reports:

The committee has urged the government to consider other measures, such as a floor price for carbon dioxide emissions, which would provide industries with greater certainty over the price of carbon and help to ensure the system of pricing was effective.

The MPs said a price of €100 per tonne of CO2 could be necessary to encourage investment, compared with current prices of about €13.

So is the committee correct? Or is a low price of carbon merely temporary, with firms realising that the price will rise as the European economy recovers? The following articles examine the issues.

Carbon markets failing, say British MPs Financial Times, Fiona Harvey (8/2/10)
Carbon prices are going the wrong way Independent, David Prosser (8/2/10)
U.K. Lawmakers Call for Intervention in Carbon Market BusinessWeek, Catherine Airlie and Ewa Krukowska (8/2/10)
UK should press EU for tighter carbon caps Reuters, Nina Chestney (8/2/10)
MPs propose carbon tax to boost green investment Guardian, Terry Macalister (8/2/10)
As UK Cap and Trade Falters, Government May Prop Up Carbon Prices Environmental Leader (9/2/10)
EU ETS intervention call howled down CarbonPositive (9/2/10)

The report
The role of carbon markets in preventing dangerous climage change Environmental Audit Committee

Questions

  1. Explain how the ETS works.
  2. What determines the price of carbon in the ETS? Why has it fallen in recent months?
  3. Compare the alternative policy approaches for encouraging green investment.
  4. What are the advantages and disadvantages of setting a floor price for carbon permits? What would be the effect on the balance of demand for and supply of premits?
  5. Discuss whether the total number of permits allocated should be reduced (i.e. the cap tightened).
  6. Compare the relative merits of giving the allocation of permits away with auctioning them.
  7. Compare the relative merits of a cap-and-trade system with green taxes.