Josh Chaffin

In a post last September, I observed that carbon prices in the EU’s emission trading system (ETS) were so low they failed to incentivize hoped-for technology innovation, yet so high EU governments had to establish a “carbon compensation fund” to keep manufacturers from offshoring their operations. At the time, Reuters reported, permit prices for December had fallen to €7.74 ($9.98) per ton.

Thurdsay’s Financial Times (registration required) reports that EU carbon prices crashed this week to a record low of €2.81 ($3.79) per ton, recovering slightly to €4.41 per ton. The FT observes that carbon permits “have lost 85 per cent of their value from mid-2011 as economic weakness has exacerbated the glut in supply.”

Once again traders and EU officials fret that carbon prices are too low to spur investment in ‘green’ technologies. But there’s a new wrinkle. During most of its history, the ETS was mainly a system of free permit allocations to covered entities. Critics complained that big energy producers reaped windfall profits at the expense of manufacturers and consumers. Their proposed cure was to auction most allowances and make ‘polluters’ pay. Yet the collapse of carbon prices is partly due to “a new system introduced this month to auction allowances,” which has added “millions more allowances . . . to an already oversupplied market each week.”

The one thing you can take to the bank is that the collapse of carbon prices will induce none of the EU firms receiving millions of Euros from the carbon compensation fund to return any of the money to taxpayers.