A [Reuters article today](http://www.reuters.com/article/GCA-GreenBusiness/idUSTRE50K4QT20090121 “”) neatly explains the current cause of the carbon price collapse. Over allocated companies, having looked at their end of year numbers for 2008, are selling off spare permits in large volumes (an estimated €1 billion Euros worth so far) safe in the knowledge that their emissions are well below their cap and are likely to remain that way for the remainder of the trading period. They will no doubt too be acting in the knowledge that the deal struck pre-Christmas helps to ensure they will continue to receive free allocations for a long time to come and can therefore safely cash in now to help them weather the current economic storm.
That the EU ETS should have been subverted into an industrial assistance programme is not surprising but it is a great shame. What could and should have been a mechanism to kick start investment in much needed low carbon efficient technologies has become a massive cash redistribution exercise from European citizens, via their electricity bills, to heavy industry across the economic zone.
I have long believed that Europe took a wrong turn when it embarked on a unilateral emissions trading scheme that covered industries whose products are priced in a global market. It was always going to result in fierce lobbying and inevitable political compromise. Had they decided to stick with the large sectors like electricity, which cannot move and are not exposed to international competition, they would have been able to proceed with much more ambition and clarity of purpose.
And the story we could tell the rest of the world would have been much more impressive. In the UK our power sector has received up a third fewer permits than it needs. It is therefore a potentially significant investor in efficiency improvements in its own sector and emissions reductions elsewhere including overseas. However, in reality it is now merely a conduit for the subsidising of declining European industries. So take steel out and put transport emissions in: enabling the cost of investing in climate solutions to be spread out across the economy without the watering-down effect that comes from trying to protect industries via the back door.
Sandbag has been set up to scrutinise how emissions trading is working on the ground and when, in a few months, official data for emissions in 2008 is released, we will be quantifying the scale of this over-allocation problem in detail, publishing our findings in easily accessible formats and lobbying to introduce changes in policy to correct it. Our aim is to slay the myth that emissions trading is a cause of economic hardship and to secure changes in the rules that prevent the scheme and the carbon price from collapsing in the future.
There is, however, an equally important aspect to our campaign that can help limit the price collapse in this phase and in the future – and that is voluntary cancellation of permits from the market. Governments can do this by reducing the number of permits they plan to auction into the market (releasing yet more will just push the price lower), companies can do this by deciding to cancel rather than sell or bank their spare permits (for which society will reward them with much praise and glory) – and individuals can do it by joining Sandbag. A very large number of individuals (or a few individuals with lots of money) would be needed to materially affect the price but it is in theory at least an immediate solution.
So if you are a philanthropic billionaire, or an enlightened corporate wishing to see market based solutions to climate change survive, please do get in touch.
Finally, as we have said before, we also want other countries to learn from this experiment – so please Mr. Obama, Mr. Rudd and Ms. Wong ensure your cap and trade schemes are fit for purpose and don’t allow vested interests to wreck what could, if properly designed, be most powerful engines for change.