The Trouble with Carbon Trading

On paper, carbon trading programs sound simple. Companies are given a fixed emissions allowance, and those that stay within their quota can sell their remaining balances to other, less environmentally responsible businesses. The invisible hand of the market should do the rest, rewarding the greenest companies and giving polluters a tangible incentive to clean up their acts.

Unfortunately, even simple ideas can go wrong. The EU’s Emissions Trading Scheme, launched in 2005, recently took a battering from the World Wildlife Fund (WWF). The environmental nonprofit claims that the program has been so badly run that it is now virtually ineffective. The group’s whistleblowing report, Emission Impossible, raises serious questions about Europe’s ability to meet its Kyoto commitments - and about the future of a policy many greens believe must be at the heart of any global climate change strategy.

According to the WWF, the failure of the EU’s $25 billion emissions trade can be traced to one major mistake: When putting the system in place, planners got their sums horribly wrong. The miscalculation saw 170 million extra carbon allowances issued to the EU’s biggest polluters, who swiftly sold off the surplus for a tidy profit. In doing so, they flooded the fledgling market. These days, carbon-allowance prices are so low that polluters have little incentive to quit pumping smoke.

Defenders of the European experiment dismiss the problem as hiccups: With the project in its infancy, they say, a few teething pains were inevitable. Unfortunately, things are set to go from bad to worse: As the program enters its second phase, European companies are poised to start buying cheap carbon offsets from poorly-regulated, overseas projects. The WWF fears the foreign projects will fail to reduce carbon levels by the amount they are supposed to, and warns that European businesses will use the loophole to buy their way out of taking responsibility for their emissions.

The real danger, though, is that flaws in the European scheme will cause world leaders to cool off on plans to globalize carbon trading. The importance of emission trading shouldn’t be underestimated: A genuinely global market would give developing-world polluters meaningful incentives to go green, while also smoothing out the kinks in a system that currently allows first-world consumers to effectively outsource their environmental footprints. Europe’s apparent failure is a reminder that getting such a system off the ground will require determination, forethought, luck, and political courage. There’s too much at stake for us to simply go back to the drawing board.

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