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Journalists still confused over carbon prices

Both the New York Times and the Wall Street Journal were at it this week, flogging stories about how falling carbon prices are threatening clean technology. I’ve written before about how easy it is to get distracted by carbon prices, which, under cap-and-trade are more of a symptom of broader issues, not a cause.

The Journal piece is fairly defensible. The Times piece is fairly hopeless:

> Another blow to the sector is the tumbling price of permits for emitting carbon dioxide, the main greenhouse gas. In countries where emitters must buy these permits, like those in the European Union, low prices mean emitters have fewer incentives to make their production process more efficient or move to less greenhouse gas intensive fuels.

No. Decreased consumption due to a massive recession, coupled with price declines for natural gas and other factors, is removing incentives to invest in efficiency or renewable energy. The sagging carbon price reflects that fact. It doesn’t cause it.

A substantive point lurks beneath the Times article: carbon price volatility is one of the bad features of a poorly designed cap-and-trade system. Even if the specific price of carbon isn’t really the point, lots of bouncing around doesn’t do the environment or the economy a ton of good.

Fortunately, provisions for “banking” permits — meaning that they can be carried over from one year to the next — can do a lot to smooth out price volatility while maintaining the integrity of the cap. RGGI allows banking, the California AB 32 scoping plan includes banking, and even the recent USCAP plan calls for banking. The European system lacked banking in its first iteration, but includes it now. Long story short, any national system in the U.S. will likely include provisions for banking allowances, which hopefully will dampen some of the price volatility Europe is currently experiencing.

But not all of it. This recession is really deep. Observers are forecasting a 20 – 30% drop in industrial output in Europe. Firms aren’t worried overly much about banking allowances if they’re not sure they’re even going to survive. Banking can help dampen volatility, but it can’t make it go away entirely.

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