Permits to pollute can be bought too cheaply

When the carbon price collapsed to below €3 in April this year, EU policymakers sought to prop up carbon prices by a deal that would delay the release of carbon allowances (known as “backloading”). This deal was agreed by the European Parliament in July, but has had little impact – prices still languish at around €4-5, well below the highs of €30, the sort of level economists consider necessary to bring emissions under control. Is this a disaster? Does it mean the death of the carbon markets, as many have suggested?

A recent op-ed in the Financial Times made the case that prices do not matter much. The emissions trading scheme (ETS) simply ensures that Europe meets its emissions targets. A low carbon price is not necessarily a sign of trouble. In fact, if – it’s a big if – it’s the result of substantial, sustainable emissions reductions, a low price is a sign of success.

But is the point of the ETS simply to ensure that a short-term cap is met? And if so, can the ETS be considered to be a success?