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EU carbon-trading market has reduced emissions despite low carbon prices

Photograph of out grocery market.
Enlarge / It’s not that kind of market, but remember going places?

There’s more than one way to get people to do something. You could just tell them they have to do it, of course. But you could instead give them an end goal and an incentive to get there and let them work out how. The latter is basically the idea behind carbon cap-and-trade markets. You set a cap on the total amount of greenhouse gas that can be emitted and then let entities buy and sell the permits that allow a defined quantity of emissions. If one company can’t clean up its process, it will have to buy permits from one that can. If another company reduces its emissions greatly, it will be able to sell its excess permits for additional profit.

The EU set up one of these markets in 2005, known as the European Union Emissions Trading System, that covers emissions of industry and power plants. The price for permits has remained quite low on the market, though, prompting criticism that it was too lax to have any impact. Prices started between 20 and 30 euros per ton of CO2 but have drifted below 10 euros in recent years. A new study by Patrick Bayer of the University of Strathclyde and Michaël Aklin of the University of Pittsburgh argues that it isn’t quite that simple, and the permits are having an effect despite their bargain-basement pricing.

Low, low prices

For starters, the price can be low for a number of reasons. Criticism has generally focused on the allocation of permits by governments—if there are too many given away, there’s little need to trade on the market. The researchers point out that there are other reasons that demand for permits can be low, including emissions reductions progressing faster than the overall cap is being ratcheted down.

So to evaluate the impact of the market so far, the researchers attempted something difficult: estimating emissions in a hypothetical world in which the market didn’t exist. They used a statistical model based on detailed data from different economic sectors in each country. In essence, the model spits out emissions when you plug in Gross Domestic Product, with knobs to turn for factors like the share of renewables in the electric grid and policies like the carbon permit market.

The model-estimated emissions with the carbon market in existence match what actually happened, and this is compared to the estimate for a world where the market was never created. That’s not the only difference, though, which is important. The market also started around the time of the (last) economic recession, and it’s not the only policy affecting emissions. The model isn’t simply comparing current emissions with 2005 emissions—that would be easier but much less useful.

Every little bit helps

The results are calculated by cumulative emissions between 2008 and 2016. (The first several years of the market were a pilot phase, so the researchers start from the 2008 relaunch.) The model estimates that total emissions in the sectors participating in the carbon cap-and-trade market were reduced by about 7.5 percent because of the market. If you include all the emissions not covered in the market, that’s a 3.8 percent reduction for the EU.

That’s about half of what the EU had promised to do as part of the Kyoto Protocol. Together with other policies and trends, the market enabled the EU to hit that target.

This model estimate of a world without the carbon cap-and-trade market has to be taken with a grain of salt, but it would indicate that the program has had an impact despite the low prices. It’s possible that some of the apparent emissions reductions actually just moved to other countries outside the EU—what’s referred to as “carbon leakage.” But where the researchers checked sectors that can’t really relocate, they still saw consistent reductions, so this isn’t just sleight of hand.

The team concludes that carbon trading markets can work, even at low prices, so long as people believe that they’re here to stay. Even if the price is currently low, the fact that it will continue to be non-zero—and could well go higher—is enough to make it part of the long-term calculus for companies. Bayer and Aklin write, “For this to be true, however, strong political commitment to continued carbon regulation in the future and increased scarcity in markets is needed. Absent such political will, low prices will do little to decarbonize regulated economies.”

PNAS, 2020. DOI: 10.1073/pnas.1918128117 (About DOIs).

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