The European carbon market hit hard by the law of unintended consequences:  A collapsing carbon market makes mega-pollution cheap

Set up to price pollution out of existence, carbon trading is pricing it back in. Europe’s carbon markets are in collapse.

Yet the hiss of escaping gas is almost inaudible. There’s no big news headline, nothing sensational for TV viewers to watch; no queues outside banks or missing Texan showmen. You can’t see or hear a market for a pollutant tumble. But at stake is what was supposed to be a central lever in the world’s effort to turn back climate change. Intended to price fossil fuels out of the market, the system is instead turning them into the rational economic choice.

That there exists something called carbon trading is about all that most people know. A few know, too, that Europe has created carbon exchanges, and traders who buy and sell. Few but the professionals, however, know that this market is now failing in its purpose: to edge up the cost of emitting CO2.

It’s all the market’s fault:

The theory sounded fine in the boom years, back when Nicholas Stern described climate change as “the biggest market failure in history” – a market failure to which carbon trading was meant to be a market solution. Instead, it’s bolstering the business case for fossil fuels.

Understanding why is easy. A year ago European governments allocated a limited number of carbon emission permits to their big polluters. Businesses that reduce pollution are allowed to sell spare permits to ones that need more. As demand outstrips this capped supply, and the price of permits rises, an incentive grows to invest in green energy. Why buy costly permits to keep a coal plant running when you can put the cash into clean power instead?

The carbon bubble burst:

All this only works as the carbon price lifts. As with 1924 Château Lafite or Damian Hirst’s diamond skulls, scarcity and speculation create the value. If permits are cheap, and everyone has lots, the green incentive crashes into reverse. As recession slashes output, companies pile up permits they don’t need and sell them on. The price falls, and anyone who wants to pollute can afford to do so. The result is a system that does nothing at all for climate change but a lot for the bottom lines of mega-polluters such as the steelmaker Corus: industrial assistance in camouflage.

Government failed because it didn’t rig, excuse me, regulate the system enough:

The lesson of the carbon slump, like the credit crunch, is that markets can be a conduit, but not a substitute, for political will. They only work when properly primed and regulated. Europe hoped that the mere creation of a carbon market would drive everyone away from fossil fuels. It forgot that demand had to outstrip supply, and that if growth stops, demand drops too.

…The market must be unashamedly rigged to force supply below demand. The obvious way would be to cut the number of permits in circulation, but in a recession no government will be brave enough to do that. And private initiatives such as Sandbag, which encourages individuals to buy and lock away permits, can exert little pressure on price in a market awash with them.

The state of modern European political and economic thinking:  markets are for imposing a government’s will on a populace that won’t voluntarily go along.  Markets as a free exchange of products and services between productive people?  A silly American capitalist idea whose time, in Europe at least, has gone.

Oh, and President Obama wants to set up this bogus “market” here, too.

From Open Europe