Flashy sports car design, fusion cuisine, serial infidelity, public-sector financial crises—whatever the latest fashion happens to be, chances are you’ll find its origins in Europe, California, or both. So it should come as no surprise that the newest trend in Canadian climate-change policy is appropriately Europe-inspired and California-infused.
The European Union has operated a cap-and-trade carbon-trading system since 2005, setting an overall limit on carbon emissions among 27 participating nations and distributing or auctioning pollution permits to power generators, manufacturers and anyone else emitting carbon. Over time, the number of permits issued is to be lowered, forcing Europe to get cleaner and more efficient.
Plenty of pointy-headed folk admire cap-and-trade because it appears to muster market forces to make industry more virtuous. Firms can choose to use their allowable emissions or invest in pollution-reduction technologies and sell the unused permits on the open market. A healthy exchange of carbon permits gives everyone an incentive to improve. Politicians also like cap-and-trade because they don’t have to align themselves with carbon taxes.
Last month marked the beginning of a new phase for Europe’s market, with emissions permits ratcheting down for the first time. Another milestone was met with the appearance last year of a Euro-style trading mechanism in California—the first in North America. Now Canada is next on the list of early adopters. The Quebec government recently approved rules linking its planned carbon-trading system with California; permits covering some 60 provincial firms are to be allocated this spring, and a trial auction could be held soon. And in January, Ontario released a discussion paper soliciting input on a cap-and-trade plan of its own. Carbon trading is certainly fashionable and popular these days. But is it practical enough to wear around the house?
The lessons so far from Europe aren’t encouraging. While $20 per tonne of carbon is often considered the minimum price necessary to have a noticeable effect on emissions, the European market recently bottomed out at $4. (It’s currently below $5. California carbon is trading a few bucks above its mandated floor price of $11.) The reason for the flat prices? Politicians can’t keep their hands off the system.
Germany is planning to give its biggest energy users an estimated $800 million a year in subsidies to shield them from carbon prices. Britain has announced a $200-million outlay for the same reason. Both moves are driven by complaints from domestic business groups worried they’re about to lose out to competitors overseas who don’t face a carbon market. It’s a reasonable fear—one that undermines the entire concept of capping and trading.
More problems: the market is awash in permits, including a flood of offsets from Russia and Ukraine issued under a previous UN program. According to Point Carbon, a carbon-trading news service, the surplus could reach 1.8 billion tonnes by the end of 2013. The European Parliament is now considering a controversial plan to manipulate the supply of permits to stabilize prices. All this government meddling has rendered the market signal of carbon prices meaningless, a disaster if you happen to care about emissions. Rather than rushing ahead, Canada ought to wait and see if Europe can fix its carbon mess first.
Any attempt at economy-wide carbon trading will be imperilled by the eternal temptations of political manipulation and cross-border subsidy competition. If governments can’t stop themselves from delivering handouts to auto manufacturers, movie-makers, solar power generators, dairy farmers and just about anyone else with a sob story and a lobbyist, why expect carbon to be any different?
The current carbon-trading fad says less about the environment than it does about governments finding new ways to insert themselves into the heart of business decisions: picking winners, sheltering losers and generally making a muck of markets. Fashions fade. Politics is eternal.
Peter Shawn Taylor is a writer specializing in economic issues