Carbon trading has been widely promoted as a solution to climate change. In a carbon trading system, also known as 'cap and trade', government sets a limit on the amount of emissions allowed within a given period – the 'cap'. Permits giving the right to emit CO2 are then auctioned or allocated for free to industries covered by the scheme. If a company emits more than it has permits for, it must buy extra from another company who has surplus – the 'trade' element.
In theory, because the total amount of emissions is capped, carbon trading will lead to reductions. But the system is flawed. Because carbon trading incentivises the lowest cost reductions first, it leaves the hardest changes until last, locking-in high carbon infrastructure.
The carbon price required to stimulate investment in low-carbon technology or make renewables truly competitive is much higher than has been delivered by carbon markets. Intervention to ensure carbon prices are at the levels required would be politically unpopular.
This means carbon trading is locking us onto a dirty, high carbon path and a continued reliance on fossil fuels. It is undermining our chances of avoiding catastrophic climate change by delaying the much needed transformation of our economies away from fossil fuel use.
The European Union's Emissions Trading System (EU-ETS), launched in 2005, is the largest carbon trading market in the world. It is the EU's principal policy mechanism for reducing greenhouse gas emissions in the power generation and industrial sectors.
The EU-ETS has been a failure. In an increasingly urgent environmental situation, the system is not delivering the emission cuts required by science, historical responsibility and sound financial practice.
Massive over-allocation of emissions permits means the carbon price is too low to incentivise decarbonisation. Human error has resulted in huge fluctuations in the carbon price. Fraud has led to millions of emissions permits being stolen. And polluting companies have received windfall profits through the free allocation of emissions permits.
More than simply delaying or avoiding action on climate change, the choice to invest so much political capital in the EU-ETS is obstructing other tried and tested measures that would lead to more certain results. Regulation, taxation and subsidies are more effective at delivering the scale and speed of emissions reductions necessary to avoid catastrophic climate change.
Friends of the Earth believes it is time for the European Union to recognise that the ETS is failing. Rather than depend on this uncertain, ineffective, and unfair system, the EU must privilege other forms of action. This means stronger laws to cut emissions such as national climate laws, developing renewables, and increasing energy efficiency.