Carbon Trading: A Tale of Two Continents

California's second auction saw a 35% increase in the price paid for a carbon pollution permit to $13.62, while prices at the much larger European market continue to fall and permits go unsold. The price there recently fell to $6.46.
February 25, 2013, 10am PST | Irvin Dawid
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Comparisons are difficult because the markets are so different. California sold all of its 12.9 million permits - a permit being the right to emit one metric ton of carbon, while most of the emissions are initially given free to industry. The much older European Union Emissions Trading System (ETS), launched in 2005, auctions hundred of millions of permits.

Lynn Doan writes that "(t)he sale (of the CA auction) was expected to clear at $12.30 a ton, according to a Bloomberg New Energy Finance analysis".  The price from the first auction on Nov. 14 price was $10.09.

It looks clearly like a very healthy auction result, at least on the surface,” Lenny Hochschild, head of global carbon trading for broker Evolution Markets in White Plains, New York, said by telephone.

California’s carbon cap-and-trade system is the largest of its kind in the U.S. and the second-biggest carbon market in the world behind the European Union’s. The state, which cites its program as an example for the rest of the world to follow, plans to use it and other emissions-reduction measures to cut greenhouse-gas pollution to 1990 levels by 2020.

Indeed, the California market, which set a minimum price for permits, is being eyed by the ETS, according to Sean Carney, who writes about the "turbulence" the ETS is encountering.

A minimum price (for permits) could prevent another crash, said Divya Reddy, a Washington-based analyst for Eurasia Group who follows climate change. "But from a political perspective it looks unlikely," she added.

Carney writes that "(p)rices for polluting have plummeted, the result of an oversupply of emissions permits in the European carbon-trading market and slackening demand for electricity amid the Continent's economic woes—a development that is calling into question the effectiveness of similar programs world-wide".  The relationship between carbon trading and the economic downturn in Europe was reported here last March.

The California program appears to be the exception - as even the East Coast carbon trading program, the Regional Greenhouse Gas Initiative (RGGI) is experiencing difficulties as was reported here. But with only two auctions to date and the economy in recovery, it may be too early to call the program a success. And there's always the lawsuit by the California Chamber of Commerce that could upend the program entirely.

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Published on Friday, February 22, 2013 in Bloomberg News
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