Carbon Markets in Trouble – 7/25/16

Carbon markets are in trouble.

The system, under which businesses buy and sell permits for their carbon emissions, was meant encourage early adoption of low carbon technologies, but new mandates and messy politics have created a mismatch in supply and demand so large that permit prices are plunging. According to Bloomberg, the price of carbon permits in the U.S. has dropped 40% since the start of 2016.

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Instead of weathering the storm of lobbying efforts that would come before, during, and after attempts to strengthen caps on emissions, many policymakers have chosen to pursue more inconspicuous, if less efficient, measures. California, for example, now requires less carbon intense gasoline and mandates that utilities to buy more solar and wind power. With other policies driving down emissions faster than politicians can lower caps on overall emissions, demand for permits is falling fast and carbon markets are fast losing their purpose.

Carbon markets were meant to be a free market solution to climate change; they were supposed to be the most cost-effective, dollar per ton of CO2, means of fighting emissions. Instead, more money is flowing to things like renewable-energy subsidies directly from the government. That’s not to say that it is bad to have money flowing to solar and wind, it’s just that there might’ve been a better method that fell by the wayside.

A carbon market could easily encourage investment in alternative energy if the officials behind it had the political will to run it the way it was meant to be run. In theory, well-implemented carbon markets with a steadily falling caps on total emissions would distribute capital faster and with less wasteful spending than the government could hope to. Sadly, not all ideas that make sense in theory survive real world testing and, for now at least, carbon markets seem like a smart idea that stumbles when up against a less than logical political scene.

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