Skip to content

Backloading: The bad idea that thankfully failed

by on April 22, 2013

Hopefully the recent vote against the back-loading proposal means that politicians will start enforcing the cap and trade system instead of undermining it. Policymakers should look at the failed policy that lead to lower prices, instead of constantly rigging the system. The flaw is not a market for carbon credits. If implemented and enforced properly mechanism will reduce emissions, the price of carbon at one point in time does not matter. All that needs to be done is cut out the government-failure.

Image

 Market-failure

A free market does not price pollution properly. What should we do do? There are two different market mechanisms to limit CO2 emissions.

1. Cap and Trade:

Governments (in there wisdom) decide how much can be emitted, and issue permits to this limit. CO2 is limited to a “safe” level, has been decided apon. The main advantage is that this ensures (if properly implemented) certainty that a certain carbon limit is reached. The price of carbon, at given time, is irrelevant. Prices adjust to reach the level and will not be stable over time.

2. Carbon Tax

Governments (with similar wisdom) decide how much damage carbon does and tax this amount. In this case the price is stable and predefined yet here is no abatement certainty, but this does not matter as society pays for the costs of carbon with a tax up front. This money can be used for adaption.

The European Union has chosen for option 1. They have set a carbon emissions limit and it is up to industries to find a way to produce within this given constraint. The lower price for carbon credits simply reflects the market’s opinion that these credits are no longer as scarce or that abatement is cheap . A low price does not mean that the cap and trade instrument itself is flawed, nor that the target will not be met.

Not market, but government-failure

So why all this bleating about low ETS credit prices? If the 2030 cap is set correctly we should all be fine right? Yes we will under 2 conditions:

1. The cap is set at the right level

2. The cap is enforced

1. We will never know the “correct level”. Yet for credibility governments should stick to a specified level. It is illogical to choose for a Cap and Trade Scheme instead of a tax and then change the system as soon as the price for carbon is lower than expected.

2. This is where governments fail. The main reason for low prices is not some market-failure. The cap and trading system is still in place. The problem is the obsession of politicians to:

  •  protect “the good old boys” is some favored national industry. This has been pointed out by other bloggers such as: Robert Kyriakides;
  •  kneel to political pressure of lobby groups such as CAN Europe for a green image.

These two obsessions lead to one bad policy. Carbon credits on the cap and trade system market are reduced in the hope to drive up the carbon prices whilst free credits are dished out to national industries. Hopefully the recent vote is a turning point to policy reform. Let us hope that the market mechanism is left to do its job and policymakers will do theirs by enforcing instead of undermining the ETS trading system. If California can learn from the EU’s mistakes their cap and trade system may even work.

Advertisements
One Comment

Trackbacks & Pingbacks

  1. ETS: duidelijk een volumesysteem | Het Kladblad

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: