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Europe’s Carbon Market Failures Expose Flaws in the Cap and Trade System
There once was a time when cap and trade plans looked like our best hope for limiting carbon emissions. But recent fluctuations in the European carbon market seem to indicate trouble in paradise. The prices of carbon allowances — necessary for any company that plans to produce more emissions than allotted — have dropped down to 10% of what they were once worth. While that’s bad news for investors, it also gives polluters a cheap way to continue polluting as usual.
Last week, the price of carbon allowances settled at $3.90 after an all-time high of $40 just a few years ago and an all-time low of nearly zero. Ever since that high, the price has consistently crawled lower and lower, hovering in the single digits for at least a year.
For those who make money off of the market of trading carbon allowances, it has made for a difficult year. But the bigger problem is that the cost of buying allowances is so low that they are cheap for any company that wants to continue polluting, defeating the purpose of the system. When the price of carbon allowances was high, companies scrambled to invest in renewable energy like wind and solar. That is no longer the case now that prices are low.
The system works by placing a cap on how many emissions a company can produce. Allowances can be purchased through a national auction system, which gives the company the ability to produce more emissions. Over time, the number of available credits would be reduced, thereby reducing emissions. The problem is that there are far too many credits available on the market right now, and the EU has refused to address the problem. For now, the cap and trade system’s problems indicate that a solution without strict government oversight isn’t really much of a solution at all.
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