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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  1. Tom Harrison - January 27, 2009

    Adam –
    Maybe one of the biggest issues with cap-and-trade is that it is inscrutable without a pretty solid understanding of economics. It’s far from intuitive, and the kind of lame implementation in Europe may have given it a bad rep.
    It’s going to be a long row to hoe getting something big enough to do any good passed.
    Thanks for making sure at least some sliver of us are disabused of common journalistic errors.
    You, and Jon Stewart :-)

  2. Geoff - January 28, 2009

    Adam,
    Your analysis is spot on. Sadly, carbon markets must now contend with the same lack of trust engendered by the excesses of sub-prime lending and securitization that plagued energy trading after the California electricity crisis and Enron scandal. This lack of trust has also improved the prospects of a carbon tax, which still suffers from the fatal flaw of relying on fiat, rather than price discovery, for setting the cost of GHG emissions.
    A hybrid of the two may be the best solution possible in today’s environment, perhaps by underpinning cap & trade with a strong and rising floor price for carbon, improving corporate and governmental planning by reducing volatility and increasing certainty.

  3. Brendan - January 28, 2009

    Good points about banking credits. Without the ability to retain value by banking credits, no investor will want to put up money for a carbon offset project that may take 10 years to turn a profit. This seems like an obvious point, but the mistake has been made already.
    In Washington State, I am afraid that Governor Gregoire will sign on to a very poorly designed cap and trade program. Some pseudo-environmental groups have already begun to call it “cap and invest” as they are set to strip all of the trading out of the bill. I question whether the purpose of this legislation is actually to reduce carbon dioxide, or increase the influence of some special interests and government programs. My hunch was confirmed by a project we did to offer members of Congress carbon neutral campaign services.
    Am I cynical? Climate change is too big to solve without changing the incentives for GHG pollution, but market based environmentalism cannot work when the profit motive is stripped out. How do you teach this to a bureaucrat?

  4. Tom Harrison - February 5, 2009

    Hey Adam — Looks like the NY Times is beginning to get the idea, but still not quite there:
    http://greeninc.blogs.nytimes.com/2009/02/05/does-it-matter-if-carbon-prices-plummet/

  5. Adam Stein - February 6, 2009

    Yeah, I saw that. Looks like if enough people say something, they get the idea. Which is nice.

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