The cautionary tale of the EU carbon market -

The cautionary tale of the EU carbon market

Questioning the present and future of carbon pricing


The European Union’s carbon market is in shambles. Bryan Walsh considers what went wrong and what it means.

Backloading failed because even in very green Europe, economic concerns seemed to trump environmental ones. European Parliamentary members worried that any action that would cause the price of carbon to rise would add to European industry’s already high energy costs. Europe, unlike the U.S., doesn’t have relatively cheap, relatively clean natural gas to help cushion that blow. At the same time, European nations like Germany are rethinking some of their renewable energy policies, concerned by the rising cost of electricity. It looks like a textbook example of what Roger Pielke Jr. calls the “iron law of climate policy“: when climate policy starts to hurt economically, even the greenest states start to back away.

It’s possible that backloading may get a second chance before the European Parliament, and even without a viable carbon market, Europe is still the global leader in climate action. Nor is the ETS the only game in town. California launched its own cap-and-trade system this year—though that’s come under political pressure as well—and Australia has introduced a price on carbon. China may do so as well. But the hope that we may be able to reduce carbon emissions the same way we cut pollutants like sulfur dioxide and nitrous oxide—through a well-run cap-and-trade —seems to be dimming, a victim of its own complexity and a sluggish global economy. That might leave the door open for other policies, including a straight carbon tax, more support for renewables or increases R&D funding for carbon-free power. We could use all three, but carbon markets may be finished. If carbon trading can’t make it in Europe, it can’t make it anywhere.

China is apparently undeterred.

The developments in Europe might be interpreted in one of two ways: either it is evidence that carbon markets won’t work or it puts the onus on those who propose carbon markets to explain how their proposal accounts for the shortcomings of the European system.

There is, it seems to me, another looming issue, another one which the NDP will have to account for. Let’s say that, by 2015, British Columbia has expanded its carbon tax (as the BC NDP currently proposes), Alberta has increased its carbon tax (as the Progressive Conservative government there seems to be considering), Quebec has a cap-and-trade system linked with California (as both jurisdictions are moving towards) and, say, one other province has implemented a carbon-pricing mechanism of some kind (Manitoba? Ontario? Newfoundland?). How then does the NDP reconcile its proposal for a national cap-and-trade system with all of that? What do the Liberals—Mr. Trudeau having offered vague support for a price on carbon—propose? Do we end up with a number of different approaches—carbon taxes, carbon markets and regulatory regimes—functioning within the country? Does that make sense? Is it feasible or political possible to build a national carbon-pricing mechanism, or at least a national approach that takes into account provincial jurisdiction?

Jean Charest thinks the country is headed towards a carbon tax. Somewhere Stephane Dion is either nodding grimly or screaming.

Update 4:19pm. Further to this post, I sent along a question to the NDP side: How would an NDP government reconcile a national cap-and-trade system with provincial jurisdictions that already have carbon-pricing mechanisms? The response from Thomas Mulcair’s office is as follows.

We will deal with this as we’ll deal with every other issues of shared responsibility: by cooperation.

I’ve asked a few smart people if they have any thoughts on the way forward and hope to post those in the next while.