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Spike in EU carbon prices

The July 7 issue of the Economist has a brief survey (subscription required) of Europe’s new carbon markets. Money has poured into these trading systems, recently driving prices to $31.66/ton of carbon dioxide.

At this point you may be thinking: $31.66/ton? The Utility/Performance TerraPass offsets 10 tons of carbon dioxide for $79.95, which covers both the carbon remediation and the overhead of running a business. At EU prices, we’d be losing several hundred dollars on every sale. What’s going on here?

Basically, carbon is a lot cheaper in the US, for a variety of reasons that all boil down to supply and demand. The US carbon market is far less well-developed than the European one, and right now the number of people in the US looking to sell clean energy is greater than the number looking to buy it. If the US government ever intervenes in the way that the EU has, requiring corporations to trade pollution permits, this picture would change dramatically.

The Economist speculates that high gas prices might be one of the specific factors causing the surge in European carbon prices:

When gas is dear, as it is now, utilities use more coal; because coal is dirtier, they have to buy more pollution permits in penance.

This is a nifty example of carbon markets working exactly as they should. Utilities are free to use coal, but they pay a penalty to do so. Better yet, they pay this penalty to other utilities that are willing to reduce their carbon output. Net effect: every company acts according to its economic interests, and carbon pollution is reduced.

The article ends on a cautious note:

[Will] the markets help to reverse global warming? At these volumes, no. “It is just one tool but a very important tool,” says Elliot Morley, climate-change minister at Britain’s agriculture department.

Just so. Carbon markets have to continue to grow, and even then they will just be one critical piece of a puzzle that includes clean energy and changes in consumption patterns.

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