From artificially establishing a market to trying to fix the price in 4 years

January 29, 2009 1:36 PM

The European Union Emissions Trading Scheme (ETS) has been a complete mess (Open Europe, PDF) since it was created in 2005.  While it has cost NHS hospitals a fortune oil companies have made profits out of the scheme.  Countries were allowed to set their own limits and then sell any spare credits, most set very lax limits meaning that they could sell credits to the UK, which was more restrictive, which cost British business nearly £500 million a year.


For all this, the scheme has failed to establish a stable price that might encourage investment in technologies that reduce greenhouse gas emissions.  In each of the scheme's two phases, prices have started high then, when markets realise that governments have been quite generous in granting credits to favoured industries, collapsed.  This shouldn't be seen as a surprise.  Researchers at the American Enterprise Institute wrote (PDF), some time ago, about how past cap and trade schemes have ended in similar farce.  Artificial markets created by politicians, and dependent on political whim, aren't the same as real ones.  Any scheme that relies on the Government writing a huge spreadsheet providing allocations of carbon credits to every emitter from a hospital boiler up (that spreadsheet used to be on the DEFRA website) isn't going to function very well as a market.


Now, via Tim Worstall, we have Oliver Tickell at the Guardian complaining about the volatility of prices under the ETS and calling for the price to be fixed.  In just four years we've gone from calls for a market in greenhouse gas emissions to demands that the market be ignored, and the price fixed.  Given that the scheme costs tens of millions, by the Government's estimate, just to administer, why don't we scrap it?  We could do business a favour and there are already more than enough other policies (TPA, PDF) that put a price on greenhouse gas emissions.


The biggest stumbling block to getting rid of the emissions trading scheme, sadly, will be the refusal of politicians to admit they were wrong to create it in the first place.

The European Union Emissions Trading Scheme (ETS) has been a complete mess (Open Europe, PDF) since it was created in 2005.  While it has cost NHS hospitals a fortune oil companies have made profits out of the scheme.  Countries were allowed to set their own limits and then sell any spare credits, most set very lax limits meaning that they could sell credits to the UK, which was more restrictive, which cost British business nearly £500 million a year.


For all this, the scheme has failed to establish a stable price that might encourage investment in technologies that reduce greenhouse gas emissions.  In each of the scheme's two phases, prices have started high then, when markets realise that governments have been quite generous in granting credits to favoured industries, collapsed.  This shouldn't be seen as a surprise.  Researchers at the American Enterprise Institute wrote (PDF), some time ago, about how past cap and trade schemes have ended in similar farce.  Artificial markets created by politicians, and dependent on political whim, aren't the same as real ones.  Any scheme that relies on the Government writing a huge spreadsheet providing allocations of carbon credits to every emitter from a hospital boiler up (that spreadsheet used to be on the DEFRA website) isn't going to function very well as a market.


Now, via Tim Worstall, we have Oliver Tickell at the Guardian complaining about the volatility of prices under the ETS and calling for the price to be fixed.  In just four years we've gone from calls for a market in greenhouse gas emissions to demands that the market be ignored, and the price fixed.  Given that the scheme costs tens of millions, by the Government's estimate, just to administer, why don't we scrap it?  We could do business a favour and there are already more than enough other policies (TPA, PDF) that put a price on greenhouse gas emissions.


The biggest stumbling block to getting rid of the emissions trading scheme, sadly, will be the refusal of politicians to admit they were wrong to create it in the first place.

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