Monday, February 23, 2009

Climate change: the effects of the recession II

Another story on the effects of the recession on climate change policy, this time from Europe. Over there, the recession is having its predictable effects, causing factories to close and energy usage to drop. One effect of this is to lower emissions. But it has also dropped the carbon price in the EU ETS through the floor - so low that Treasury's lowball estimates are accurate for once. Which has tilted the market against renewables, and set a perverse incentive to invest in future pollution...

The underlying lesson, as in new Zealand, is simple: emissions trading only works when there is a shortage of permits. If there are too many - if allowable emissions exceed actual emissions - then they cease to be effective, and combined with bankability in fact store up emissions for the future. The only solution is to reduce the number of permits available in a recession. Unfortunately, in a poorly designed ETS, this can be difficult. In Europe, they're not going to be able to do that until 2012 - too late to have any effect. in New Zealand, we're more fortunate; the allocation of free permits to industrial polluters has not yet been decided (let alone handed out), so we stil have plenty of time to fine-tune it to ensure the system works as advertised, rather than simply being a new subprime scam.