'Just a money redistribution exercise where we foot the bill'

Bryony Worthington
The Guardian, Wednesday 28 January 2009

The pollution permit price crash highlights one of the risks of cap and trade schemes. If not properly implemented they can deliver just "hot air", and few environmental benefits. Even before the recession took hold it was clear that certain sectors of industry had received very generous allowances, but now the issue looks vastly more problematic.
What should have been a way to kick start investment in much-needed low-carbon, efficient technologies is now a cash redistribution exercise. Power companies are buying spare permits from heavy industry, and we, the electricity bill payers, are footing the cost. And the additional environmental effect of the scheme is reduced to almost nothing.
In the short term, the release of spare permits into the market diverts cash from projects that require investment which could boost the economy. It also reduces investment in projects generating reductions overseas, such as renewable projects in China and India. Longer term, a sustained low carbon price will make investment in nuclear and carbon capture and storage less likely.
We are unlikely to see a repeat of the price crash in Phase I of the scheme, where it reached near zero. This time unlimited volumes of spare permits can be banked and used in the next phase, giving them a future value. However, this will make targets easier to hit and cut the price in that phase too.
More decisions are scheduled on emissions trading in Europe and these will need to take into account the new economic context. If Europe's economy is contracting by 1.9% a year then a target which requires emissions reductions of less than this will be redundant. Restrictions on the banking of permits will also need to be introduced to prevent price deflation in the next phase.
More immediately, the flow of credits must be reduced. Cutting the number of permits governments auction is one option and incentivising firms to cancel rather than sell their permits is another.
But other countries can learn from our mistakes - so please America and Australia be bold, ensure your cap and trade schemes are fit for purpose and don't allow vested interests to wreck them.
• Bryony Worthington is the founder of sandbag.org.uk