Falling carbon prices raise questions about energy policy
Setbacks in Europe’s emissions trading system are raising fresh doubts about whether clean energy is affordable
The European Union’s cap-and-trade system was supposed to wean industry off fossil fuels by making companies pay for the carbon emissions they produce.
But with companies having cut production in response to weak economic conditions, many firms have more carbon credits than they need. On the positive side, this has helped them weather the slowdown – some have even made money selling spare credits – but the lack of demand has pushed down the price of carbon from €30 per ton a few years ago to around €5 per ton today.
With carbon at that price, it does not pay utilities and companies to switch even from coal to gas, let alone to invest in cleaner fuels and technologies, such as carbon capture and storage.
For governments wanting to encourage a shift to cleaner energy, the only other alternatives on the table are to tax emissions directly or subsidize clean energy.
The tax model has proved successful in some countries, notably Denmark, Sweden and the Netherlands, and more recently, Ireland, where taxes on emissions and rubbish are levied directly on households and businesses. Carbon emissions in Ireland dropped by around seven percent in 2011, and the carbon tax has brought €1 billion into the treasury in the three years since it was introduced. Critics counter that the burden of taxation falls mainly on the poor and that the revenues generated are not being invested in clean energy.
Taxation tends to be advocated by economists, but it is unlikely to make a significant difference to the global energy mix in the foreseeable future because it is considered politically impossible in the United States, the world’s second-largest emitter after China. Many EU countries are also lukewarm about a carbon tax because of concerns that it will push up energy prices, inhibiting economic growth and impacting jobs.
The other alternative, subsidies, has been tried most extensively in Germany, where renewables such as solar and wind power now generate almost a quarter of the electricity generated in that country. But even here, doubts are surfacing about the affordability of renewable energy sources.
On February 20, the German environment minister warned that the transition to renewable energy may cost up to €1 trillion over the next two decades. Analysts also point out that the cost of subsidizing clean energy sources actually rises rather than falls as the programs become more successful.
Against this backdrop, it is not surprising that the EU is standing firmly behind its Emissions Trading System (ETS), having decided to reduce the number of permits it sells in the next three years to support the price. President Obama also sees cap-and-trade systems as the most promising way to curb greenhouse gas emissions in the United States.
In the final analysis, the EU’s Emissions Trading System has delivered a market-based system for carbon trading. Whether it can also deliver a more sustainable energy mix in an era of slower economic growth remains very much an open question.