The European emissions trading scheme is now a success

It was not the market that failed, but the policies that governed how it worked

Alexandra Galin
The Guardian, Tuesday 17 November 2009
Your article is profoundly disheartening (Carbon trading is useless, says Friends of the Earth report, 5 November). Instead of adding political pressure to commit to emissions reduction targets, FoE criticises carbon markets and investors, who are working to make this common goal a reality.
You report: "FoE says that to date cap-and-trade carbon markets have done almost nothing to reduce emissions… [and are] unfit for purpose." They are misinformed. Markets do not reduce emissions and were not created for that purpose. Technology, energy efficiency and behavioural changes deliver reductions. Markets incentivise and finance these by putting a cost-effective price on the carbon that is most cost-effective.
"FoE claims that the first phase of the European emissions trading scheme between 2005 and 2007 failed. And the second phase, from 2008 to2012, is likely to fail too." It was not the market that failed in the first phase, but the policies that governed how the market worked. The EU designed a system in which a large proportion of emissions allowances were given away, to defray costs for industry. Phase one was the test phase and, lacking precise data, they gave away too many allowances that could not be carried over into phase two. These two design elements caused the price crash in 2007.
But the second phase was designed much more prudently. Studies note that emissions fell in year one, and analysts agree that they continue to fall. Phase two is a success. It is important to look at the markets in the longer term, just as targets are set with a 2020 goal.
Misguidedly, FoE calls for governments to use more "reliable instruments", such as a tax to replace a market-based scheme. Yet a tax is anything but reliable; it does not allow for visible target-setting, and it does not guarantee that emissions will be reduced. A carbon tax is simply another cost of doing business; as production and profits grow, the tax is paid while emissions rise. By contrast, an emissions cap allows for a clear environmental goal and a measurable target, and incentivises further reductions.
You report the FoE's fears that markets could be "hijacked by speculators and financial markets". This fear displays a failure to understand that financial institutions participate in the market largely on behalf of businesses that do not have the capacity or expertise to do so themselves. Furthermore, there are no "complex" instruments creating "shadow finance" – carbon trading uses essentially the same simple market instruments as trading in gold, wheat and coal. They have been used over decades and during recent and historical financial cycles without causing crises.
Yet a carbon market is only as good as the cap. The more ambitious the emissions reduction targets, the more visibly and effectively a market performs its function. Market nay-sayers would make better use of their time by increasing the political pressure to set ambitious reduction targets and recognise that markets help with the cost of achieving them. To criticise those who share their objective is to risk political inaction.