Low Carbon Credit Prices Are a Sign of Success, Not Failure, por Tim Worstall (Forbes):
Sadly we’ve another piece bemoaning the fact that carbon credits, under the European Union’s cap and trade plan, are low. The point that low prices are a sign of the success of the plan, not a failure of it, seems to have escaped the people advancing this argument.
The piece is here at Der Spiegel.
Emissions trading, the European Union hoped, would limit the release of harmful greenhouse gases. But it isn’t working. The price for emissions certificates has plunged, a development that is actually making coal more attractive than renewable energy.This is an unfortunate but not uncommon problem: people failing to distinguish the effects of price under a carbon tax plan and a cap and trade plan. (...)
However, my point here is about the complaint that carbon permit prices are low thus cap and trade isn’t working. This is to woefully misunderstand the role of prices in the two different systems.
Yes, of course, in a carbon tax system the higher the tax the greater the incentive to minimise emissions. So higher prices should reduce emissions more. However, prices in a cap and trade system are not the incentive themselves. It’s the permits that are the incentives and the price of those permits isn’t telling us how good an incentive they are. Rather, the price of those permits is telling us how expensive it is to reduce emissions.
Thus low permit prices are a good thing because they show us that reducing emissions is cheaper than we had thought it would be. The limitation on how many permits are available is what limits emissions, not the price of those permits.
Imagine, just as a simple example, that climate science tells us that we can only allow 100 tonnes of CO2-e to be emitted. So we create 100 one tonne permits and allow companies to bid for them. Also assume that current emissions are 150 tonnes, so some companies somewhere must reduce their emissions to get under the permit cap.
So, what would a high price for the permits tell us? That it was proving difficult and expensive to reduce emissions to under the cap. So a high price for permits would be telling us that limiting emissions was a difficult and expensive thing to do.
So what would a low price for the permits tell us? That actually, getting rid of those 50 tonnes of emissions was quite simple. We can do it with a few tweaks to the system here and there and a minimal disruption to business and the lifestyles of the consumers. That last being the thing we are really interested in of course.
So a low price for permits is actually a signal that dealing with the reductions in emissions to get them under the cap is cheaper than we thought it was going to be. Which is excellent news.