Will carbon market woes tilt U.S. pols towards carbon taxes, CAA regulation?

In today’s Guardian, Juliana Glover reports that carbon permit prices in Europe’s Emission Trading System (ETS) have crashed from €31 last summer to €8 today. This price is too low to create any incentive for covered entities to invest in ‘green’ technology.

Glover identifies two causes for the collapse of carbon permit prices. First, the recession has reduced demand for energy and, thus, for carbon permits. Second, European governments handed out “luxurious quantities” of carbon permits, free of charge, to big emitters, claiming that economic growth “would soon see them bumping against the ceiling.”

Glover says the EU must do two things to rescue the ETS:

First, the EU must stop importing permits from countries such as Russia–a bonus for a paper transaction. No one really believes that 15m tonnes of imported permits will not be emitted by a steelworks somewhere east of Novosibirsk.

Second, it must publish plans to crack down on the surplus of permits when the recession is over. Warnings of famine ahead, when the scheme enters its third stage in 2012, would raise prices now, if believed.

She concludes caustically: “Like medieval pardoners handing out unlimited indulgences, governments have created a glut. Reformation must follow. Wanted–a modern Martin Luther to nail a shaming truth to industry’s door: Europe’s whiz-bang carbon market is turning sub-prime.”

Glover’s commentary vindicates free-market critics (see, e.g., here, here, and here) who have warned that Europe’s vaunted ETS is an unsavory combination of wealth transfer and creative accounting.

My concern is what lessons if any climate doomsters here in the United States draw from Europe’s failure.

Most U.S. greens prefer cap-and-trade to carbon taxes. Part of the reason is political. Most voters oppose new taxes, but most do not understand that cap-and-trade schemes are stealth energy taxes.

Greens also argue that only cap-and-trade (a) provides “emissions certainty” (determines in advance how much and how fast emissions will decline) and (b) creates strong incentives for firms to innovate and go “beyond compliance” in order to amass and sell surplus carbon permits (transferring wealth from buyers to sellers).

But the collapse of the carbon market calls in question both alleged policy advantages of cap-and-trade. Europe’s ETS is exerting no pressure to reduce emissions in today’s distressed economy, whereas a carbon tax mostly certainly would. Moreover, the ETS is fostering creative accounting, not innovation.

While it would be premature to say that the cap-and-trade lobby is losing its clout on the Hill, it is interesting that Energy Secretary Steven Chu recently floated the idea of a carbon tax. It is also noteworthy that NASA’s James Hansen, the doyen of global warming alarmism, cautioned President-elect Obama last December that, “A carbon cap that makes one more stinking millionaire on the backs of the public is going to infuriate the public.” Hansen argued that, “A carbon tax (across all fossil fuels at their source) is essential.”

Given the Administration’s apparent determination to regulate carbon dioxide (CO2) under the Clean Air Act (CAA), we could possibly see growing support within green circles for a combination of carbon taxes and CAA regulation of CO2 from autos and large stationary sources.

Of course, this would take all the fun and profit out of global warming for the corporations pursuing European-style wealth transfers and windfall profits under cap-and-trade.

So, liberty lovers be warned: We could end up with cap-and-trade, carbon taxes, and CAA controls on CO2. As Al Gore said at his March 2007 Senate Environment and Public Works hearing, “We need it all.”