A Carbon Trading Market Perks Up

Sixteen years ago, Europe introduced a market based on what was then a revolutionary notion: forcing companies to cut greenhouse gas emissions by issuing credits that allow them to pollute up to a certain level. If they spew out more, they have to buy allowances from other companies. If they pollute less, they can sell their extra permits and bank the cash.

By Ewa Krukowska

This so-called cap-and-trade program, modeled after a U.S. effort to control acid rain, set carbon dioxide limits for more than 11,000 facilities in sectors such as power, paper, cement, and, later, aviation. It was a great idea that helped the European Union overcome a decade-long stalemate on a carbon tax, but it had a fundamental flaw: The permit levels were determined in prosperous times, and there was no plan for reducing supply in the event of a sharp fall in output.

When the global economy went into a funk in 2008, emissions plummeted, sending prices for permits into a tailspin. The problems were aggravated by imports of cheaper credits from outside the region issued under a carbon-reduction program overseen by the United Nations. By 2013 the cost of emitting a ton of carbon had tumbled from a pre-crisis high of €31 ($38) to just €2.50.