The right way to judge a carbon market (hint: it's not the prices)

Dan Upham

If you’re judging the success or validity of a carbon market like the European Union’s Emissions Trading System (ETS), the price at which carbon trades is a bit of a red herring.  In an editorial published in the Financial Times on Tuesday, Environmental Defense Fund senior economist Gernot Wagner and vice president for international climate Nathaniel Keohane argued that the focus on prices in the EU ETS – and more generally – is misplaced. 

“The key test of a carbon market is the emissions reductions it achieves,” Keohane told me. “Of course, the carbon price plays a critical role in determining the incentives for reducing emissions and investing in cleaner technologies.  But in a cap-and-trade system, the carbon price is ultimately a means to the end of reducing emissions.” 

If a low price tells us anything, Keohane suggested, it’s that there is room to tighten the cap. The goal, after all, is to make emissions scarce, not necessarily more expensive. See the full editorial on the Financial Times site for more (free registration required to read the article). 

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