Falling carbon permit prices in Europe: Threat or menace?

Michael Giberson

At Environmental Capital Keith Johnson notes that the financial market meltdown is driving down carbon permit prices in Europe, and as a result it is harder to fund clean-energy projects in the developing world.

Johnson calls this change in prospects for clean-energy developers “a negative side effect” of falling permit prices.  I can see how this change might be a negative side effort for investors in these projects, but for the rest of us falling permit prices are a good thing. After all, if the permit price reflects approximately the cost of reducing carbon emissions (a big “if”, but approximately justifiable*), then falling permit prices mean that the cost of reducing carbon emissions is going down.  If reducing carbon emissions is a worthy public policy goal, then attaining that goal is becoming cheaper.

To the non-investor, worry about the economic prospects of clean-energy projects seems to mix the ends of policy and one particular way of attaining those ends.  One advantage shared by both cap-and-trade and carbon tax proposals is that they do not wed the attainment of a goal to specific means (i.e. particular technologies or approaches), but rather let the market sort those things out in a least-cost way.

I understand, of course, reducing carbon emissions is becoming cheaper at the margin because the scale of overall economic activity is down.  That falling level of overall economic activity is a negative factor worthy of public policy attention, but the investment-worthiness of clean energy businesses is per se of no more public policy interest than the growth of dingus makers or widget manufacturing.

(*”Approximately justifiable” because companies coverned by the requirements must choose between reducing carbon emissions or buying a permit, so at the margin the price should reflect the cost of abatement.)

ASIDES:

Just because the falling level of economic activity is appropriately a matter of public policy attention doesn’t mean that public policy makers have a clue. On this topic, see Mario Rizzo’s ThinkMarkets blog post, intelligently named “The Macroeconomic Knowledge Problem.” (Around here we usually focus on microeconomic knowledge problems, so it is nice to know someone’s got our back.)

The comments by Rob Stavins comparing cap-and-trade and carbon taxes at the National Journal site (noted in my post yesterday) have now been supplemented by a number of other responses.

Rob Bradley reminds us that the policy choice isn’t just between cap-and-trade and carbon taxes.

Generally speaking, Johnson’s post at Environmental Capital provides an illustration of the mild counter-cyclical effects of a cap-and-trade approach that I mentioned briefly in yesterday’s post.

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2 thoughts on “Falling carbon permit prices in Europe: Threat or menace?

  1. In a year or 18 months, when inflation is going at 10-12%, unemployment almost as high, and the Chinese and Saudis are done dumping dollar assets and starting to require future payment in hard currency like yen or euros, this will all seem SO quaint.

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