European emissions trading: It's the tons reduced that matter most

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Coal fueled power station at sunset, Ratcliffe-On-Soar, Nottingham, England.

Last Thursday, the New York Times detailed the European Union’s most recent efforts to strengthen its carbon-emissions trading system: EU officials voted last week to reduce the number of carbon allowances in the system, a welcomed step for the world’s most ambitious carbon market to drive even more significant reductions than it has already achieved. Fewer allowances will increase the price of permits, which in turn will drive companies to take emissions into account in their energy investment decisions. Thursday’s vote brought a rise in prices of approximately 7% reaching about €6.60 ($9). However, the New York Times reported, that price is still far below where analysts say it needs to be to have an impact on the EU’s energy choices.

Not so.

Yes, a high price on carbon is good, but the price is not the end-all signal we should be looking at. In short: “Judge a carbon market by its cap, not its prices.

That’s the clear message from a Financial Times op-ed, co-authored by EDF experts Nathaniel Keohane and Gernot Wagner last summer. The op-ed reminds us that, as we focus on the European carbon price, we often forget that it has succeeded at reducing emissions – its foremost goal – and will continue to do so. The EU’s system was on its way to achieving about 70% reductions below 1990 levels by 2050 even before last Thursday's further strengthening of the system.

Like in any other market, carbon prices will rise and fall. The reductions, however, will happen by law. Low carbon prices can provide the opportunity to tighten caps further, an opportunity EU policymakers seized last Thursday, but the end goal is not for emissions to be expensive. The climate only notices how much emissions are reduced, not how much it costs to do so.

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Jonathan Camuzeaux

Jonathan Camuzeaux

Jonathan Camuzeaux is a Research Analyst in the Office of Economic Policy and Analysis at EDF. He provides economic analysis to support the development of market-based solutions to environmental issues with a focus on climate and energy economics.
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