Is Europe's Emission Reduction Too Much of a Good Thing?

Apparently the European Union's Emissions Trading System (ETS), the world's biggest carbon market, is having some problems. With its participants' emissions well below the current cap, most would think it is having the right kind of problems.

However, the dilemma is that this seemingly good turn has been caused by the economic downtown, and not the trading system itself, throwing the carbon market into a tailspin. "Having reached nearly €30 ($47) a tonne in 2008, the carbon price is now persistently under €10: much too low to prod firms to make their investment plans greener."

According to The Economist the situation is about to get worse, "The EU is in the process of selling an additional 300m permits to raise cash for green energy projects, adding to oversupply. It is also about to introduce a new regulation on energy efficiency, which will further reduce emissions and which was not factored into the current cap."

With investors in green technology pleading for intervention, possible solutions include setting a carbon floor-price and tightening the cap.