EU Gropes — in Vain — for Carbon Price Sweet Spot

by Marlo Lewis on September 12, 2012

in Features

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Two stories reprinted in Climatewire today provide a funny reminder that politicians can’t set the ‘right’ price of a commodity even when the fate of the Earth supposedly hangs in the balance. 

On Tuesday, Norway decided to follow European Union (EU) policy and establish a carbon ‘compensation fund.’ The program will bribe pay some 80 energy-intensive firms $90 million not to move their operations overseas. The government contends that without such payments, the EU Emission Trading System (ETS), adopted to implement the Kyoto Protocol, will trigger (or accelerate) the flight of capital, jobs, and emissions abroad. Reuters reports:

“The purpose is to prevent the Norwegian manufacturing industry from moving their enterprises to countries with less strict climate regulations,” Prime Minister Jens Stoltenberg said.

Changes to the EU’s Emissions Trading Scheme (ETS) from next year allow member states to compensate big energy users, like aluminum or steel producers, for costs linked to carbon emissions. The plan is to prevent higher costs driving business out of Europe.

Although ETS carbon prices are high enough to make EU manufacturers uncompetitive, those prices are not high enough (according to critics) to spur technology innovation*:

“This shows some of the fundamental problems with emissions trading,” said Steffen Kalbekken, head of research at the Center for International Climate and Environmental Research in Oslo. “We are getting the worst of two worlds.

“The (carbon) prices are too low to produce the technological shift we need” to force big emitters to clean up, he said. “But they are still high enough to cause some problems for industry and international competition.”

EU carbon permit prices for December have fallen to 7.74 Euros ($9.98) per ton — lower than three of the U.S. Government’s four ‘social cost of carbon‘ estimates. The European Commission is now “pressing ahead with a plan to counter an oversupply of CO2 permits in the EU emissions trading market after a 37 percent drop in prices last year,” Bloomberg reports. The commission “is preparing a proposal to postpone sales of an as-yet unspecified number of allowances in 2013.”

Of course, if that plan goes through, and carbon permit prices rise, European countries may have to pony up even larger subsidies to keep manfacturers from moving to Asia and South America.

So are ETS carbon permit prices too low or too high? They’re high enough to spur innovative ways to get the heck out of Europe asap.

* The notion that higher carbon prices will incentivize innovation rather than induce stagnation (and/or capital flight) is highly dubious. As noted previously on this site, gasoline taxes convert into carbon taxes and vice versa. When combusted, a gallon of gasoline emits 8.91 kilograms of CO2. This means that a $100 per ton CO2 tax on gasoline is a gasoline tax of $0.89 per gallon. For decades, Europe has been taxing gasoline at $3-$4 per gallon, thereby imposing implicit CO2 taxes of more than $300-$400 per ton.

Yes, because of high gas taxes, Europeans tend to drive dinkier cars, and more diesel cars, than Americans do, but Europe is not one mile closer than we are to achieving a ‘beyond-petroleum’ (all-electric) transport system. What’s more, despite much higher gasoline prices, EU transport sector CO2 emissions increased by 26% from 1990 to 2006, and EU transport was the fastest-growing source of GHG emissions during 1999-2008.

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