No scarcity = no market

After screwing up its internal carbon-permit trading system by issuing permits so willynilly that they became almost worthless, the EU is carrying on with phase two of the operation. This time, they’re going to impose some actual emissions restrictions, reports The Times:

The key difference in the second phase is a reduction of between 5 per cent and 10 per cent in the emissions permits granted. Mr Marcu said that he expected the tougher regime to “start delivering some substantive reductions” in carbon emissions.

City analysts believe that it will lead to a big increase in the market price of carbon. Deutsche Bank expects forward prices to rise from the present level of about €23 a tonne to €35. UBS has predicted a rise to €30 a tonne.

Michael Grubb, chief economist at the Carbon Trust, said that the changes represented a “fairly severe” cutback from the previous, regime. “In the old system, the allowances became pretty worthless,” he said.

The purpose of carbon-emissions permits is twofold:

  1. Create a mechanism for rewarding polluters that stop polluting;
  2. Create incentives to move pollution toward the most economically productive activity.

In other words, create a market for greenhouse gases. Markets only work if there’s scarcity. Maybe, maybe, the EU’s figured that out.

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