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American carbon is more expensive than European. Discuss.

Where is carbon valuedSomething strange happened today. The price for carbon allowances in the European Union dropped below the price of voluntary carbon offsets traded on the Chicago Climate Exchange.

We’ve long argued price has little to do with the fundamental quality of a carbon offset, in spite of the consistent critique that because the CCX trades at a much lower price than European carbon, it is junk. We wonder how critics will reconcile this theory with current price data.

The structure of the EU ETS is one in which price will necessarily drop to zero. Banking allowances — transferring them from one period to the next — is not allowed (except for the French, who get an exception because they invented crepes). Therefore as the 12,000 polluters under the Kyoto caps arrange to meet their targets, the value of horse trading close to the finish line will naturally diminish.

Some questions for tea room discussion:

  • The recently proposed carbon offset standard from DEFRA allows EUAs as a methodology. Will that pass muster if price drops to zero?
  • RGGI will allow EUAs as a mechanism. Does that make sense if price drops to zero?
  • Baxter Healthcare was the first entity to trade EU Allowances into the Chicago Climate Exchange. Are they the smartest carbon traders in the room?

As for TerraPass, we’re going to monitor this and continue to support high quality projects in the US. It’s the projects and their reductions that matter, not the price.

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