Tuesday, May 30, 2006

If the Carbon Markets Crash, and No One Cares...

The headline on this ENN article definitely caught my attention, and even tensed me up for a second or two, but it looks like all is well in the world of carbon emissions credit trading despite a sharp drop in prices:
Carbon prices lost 70 percent of their value in a few days late last month. If it had happened to gold, copper or sugar futures, it might have triggered a world panic.

But no one -- neither the traders nor the people who invented the trading system -- seemed overly concerned. If anything, they were pleased.

"It is evidence that the market forces are working," said Edwin Aalders, of the International Emissions Trading Association, which speaks for more than 100 European companies.

"This is a blessing in disguise," said Stephen Singer, of the Worldwide Fund for Nature, or WWF. It showed that the market is a "sound, economic and effective way to deal with environmental problems."

The collapse came when it was discovered that the European Commission had miscalculated the amount of carbon permits that industry would use or trade. Supply outstripped demand, and when year-end figures of emissions allowances released this month showed a leftover surplus, prices went into free-fall.

By coincidence, the crash happened days before the United Nations convened a session in Bonn of the Framework Convention on Climate Change, where carbon trading was created and enshrined in the landmark Kyoto Protocol that came into force in February 2005.

But it barely caused a stir among the delegates of 189 countries attending, said Janos Pasztor, of the U.N.'s Climate Change Secretariat.

"There's nothing wrong with the system, but obviously there's still some work to do in the EU countries," he said on the sidelines of the conference.
I'm guessing this means (and you who actually know something about economics help me out) that the EU has plenty of room to further clamp down on carbon emissions. I imagine that's good news. I'm guessing this also means that European companies are polluting less than originally calculated -- also good news. Of course, finally, this is a new system, so I guess glitches will happen. I'm guessing the global warming naysayers will try (or perhaps even have tried) to make hay out of this, but as the experts quoted above noted, this shows that a carbon market based on supply and demand can work -- we've just got to make sure that credits are allotted according to demand...

Just noticed -- Nick talked about this several weeks ago...

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