Kate Mackenzie How big is the threat to carbon trading?

The FT’s Tony Jackson chronicles some of the problems faced by the carbon market recently and concludes the whole system could be at risk - news that would of course be welcomed by some.

Carbon prices may have stabilised after the fallout from Copenhagen, he writes, but those hopes for a dramatic increase in the scale of the total global emissions trading has taken a blow in recent months, from Copenhagen and also from faltering efforts in the US.

Meanwhile, investment in the Clean Development Mechanism – offset projects that create credits that can be substituted for allowances – has fallen, as have low-carbon investments.

More worryingly, says Jackson, the scope of the scheme is being ‘nibbled away at’:

Begin with the mooted UK price floor for carbon.

Carbon traders hate that idea. The market is bedevilled by uncertainties already, without adding more. Where would the floor be set? How long for? And what would be the mechanism for changing it?

The problem is that the carbon price – about €13 a tonne today – is miles from the €50-€100 needed to make renewable power projects economic. Far better, analysts say, to impose a supplementary tax on fossil-fuel generators, or subsidise renewables directly.

Then there are all the proposals to tackle emissions without carbon trading at all – such as regulation to improve efficiency measures such as insulation as a way of reducing emissions.

And at the other extreme, such as creating an integrated European market for renewables, the job belongs to the public sector. In other words, subsidies again.

Nibble, nibble.

There’s the problem of offsets – from additionality to scepticism in countries where the projects are based. But that, says Jackson, would further reduce the scope of the scheme.

And the more the carbon market shrinks in its ambitions, the more it faces a broader threat: that of losing touch with its original objective. Credits could continue being traded in the old way. But if the main thrust of carbon reduction is tackled by other means, the market could face questions about its social utility.

What will happen if US cap-and-trade legislation does indeed fail, as is widely expected, and the big climate meeting in November fails to advance the agenda? The whole climate change agenda, writes Jackson, ‘could head off in a totally different direction’: a bottom-up approach, driven by the frustration of the deadlock at the top.

Related links:

A long week in the cap-and-trade debate (FT Energy Source)
Why efficiency schemes and markets don’t always mix (FT Energy Source)
Emissions reductions without cap-and-trade (FT Energy Source)