Carbon trading isn’t working

It's a dirty business

It's a dirty business

As the economic squeeze tightens, retailers, manufacturers and ultimately energy producers are experiencing a lower demand for their products. Less production means less pollution, which has to be a good thing, right?

Wrong. The trouble lies with the fact that we’re currently using two distinct currencies, money and carbon. In the good times, if that’s really what they are, the two work well together: demand drives prices of both production and the right to pollute. As production expands, the market for the limited and finite carbon permits heats up, pushing their price up. This in turn raises manufacturing costs, providing a steadying influence on the financial economy.

EU ETS price in Euros

The carbon crunch: EU ETS price in Euros

When things go wrong for business and production falls, so does the demand for carbon permits. The price of carbon permits drops (just look at what’s happened over the past month or so) and as a consequence it becomes cheaper for businesses to pollute.

Huge polluters like steel giant ArcelorMittal, which has recently shut down furnaces at more than a dozen European sites because of a lack of demand from car makers, are scrambling to sell off their now surplus permits, flooding the market and driving a collapse in value.

In itself, that’s not necessarily a bad thing, but the problem is that some of the worst offenders, the dirtiest European utilities who have been slow to change their practices and were facing a huge carbon shortfall, are now buying up huge numbers of credits at bargain prices. With no incentive for these companies to clean themselves up, the effect on the environment can only be bad.

The reason for mentioning this is that certain carbon offsetting schemes have revolved around buying and retiring EU ETS permits, the seductive idea being to reduce the overall amount of pollution allowed. But being at the mercy of the market isn’t a good thing: such schemes are faced with high costs during times when manufacturing is in full swing, whereas the current insufficient demand for permits makes their purchase effectively pointless.

Of course, planting trees remains a great way to soak up CO2, and they’re much easier to predict than the market!

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