On Tuesday February 19th, the Environment Committee of the European Parliament will make a crucial vote regarding the EU’s cap and trade regime, formally known as the emissions-trading scheme (ETS). The ETS involves the sale of carbon permits to heavy industries and power generators, charging them a fee for every tonne of CO2 they produce. Several factors such as weakened economic output, an over-abundance of free permits and access to cheaper non-European credits have significantly reduced the price of pollution. Currently, EU permits sit at €5 ($6.7) a tonne. However, the drafters of ETS legislation intended the price to be closer to €20 per tonne at this stage. When members of Parliament convene to vote on Tuesday, they will decide whether to delay a large round of permit sales, which would reduce market supply and place upward pressure on prices. Their decision has many ramifications.
If the committee fails to delay pollution allowances, also called back-loading, additional over-supply of permits will depress prices further, placing the future of the ETS itself in jeopardy. The incentive to invest in cleaner technologies and innovation will also decline. As we have already witnessed in Europe, low carbon prices drive power producers to construct more coal-fired power plants. Without Parliament’s immediate intervention, coal’s resurgence could continue. As time passes, heavy industries and power producers may find it difficult and prohibitively expensive to switch to cleaner sources. Therefore, an immediate reduction in the supply of permits would help deter pollution and subsequently spur investment in renewables.
Stabilizing prices and bolstering confidence in the ETS would provide support for cap and trade schemes outside of the EU as well. Australia and California established their own systems in 2012, while carbon-trading schemes are under review in South Korea and China. Eventually, a global system could come to fruition. If the European parliament fails to at least delay permit allowances, though, prices will continue to drop, investment in new technologies will decline and the possibility of an international ETS will falter.