There have been a few interesting pieces around recently on the subject of carbon emissions trading. The first is The Economist (subscription only) noting some of the failures of the European carbon trading market, which has seen prices of CO2 emissions collapse due to the issuing of too many free permits.
In order to get industry to swallow this scheme, allowances were handed out free to companies, rather than being (as economists wanted) auctioned. In power-generation (Europe’s most-polluting industry) companies passed the price of carbon credits on to customers and pocketed the value of the allowances. According to a report by IPA Energy Consulting, Britain’s power-generators alone made a profit of around £800m ($1.5 billion) from the scheme in its first year.
As the article notes, this failure is not a reason to rubbish the idea of emission markets altogether, but it is a good lesson in the mistakes that can be made and the need to either slash the number of permits or auction them off if the scheme is going to be worthwhile.
Another interesting piece is in this report from the World Bank(warning: large pdf file) where they note the fact that while in Europe people are paying $20 a tonne for the right to emit CO2, in the developing world land clearing releases CO2 to generate land worth far far less than the value of its implied carbon credits.
Throughout the developing world, farmers fell trees for sometimes small and ephemeral gains, creating croplands and pastures worth perhaps a couple hundred dollars a hectare. As those trees burn and rot, they release carbon dioxide
(CO2) to the atmosphere—perhaps 500 tons a hectare in dense rainforests. Meanwhile, the European Union (EU) market values CO2 abatement at $20 a ton. In other words, farmers are destroying a $10,000 asset to create one worth $200.
In what would be a straightforward application of Coase Theorem, Europeans could pay farmers in the developing world not to clear land as a more cost effective way of reducing emissions. It has the added benefit of pushing the costs of the reductions onto the people who can better afford it in the first world while supplying income for those in the third world who would otherwise been able to profit from the resource. Not to mention other environmental benefits in preserving the forests.
As the report notes there are many problems with doing this, not least the fact that the reduction is more temporary than say replacing a diesel engine with a wind turbine. Another problem is with “leakage”, where farmers just move on to new land to clear. These can be dealt with different classes of emission reductions and with cooperation from governments to assist in enforcing the agreements.
Its still early days in the emissions trading scheme and time will tell if it can be implemented effectively to reduce greenhouse emissions, particularly without the US on board. Hopefully it can, as it promises to allow a degree of innovation in approaches like the one outlined by the World Bank, that a regulation based approach would not allow.
Update: I have editted the last line which previously said just “allow” to “not allow” which was my original intention…proof read Steve, proof read. Thanks to Danial Butler for bringing this to my attention.