Is it possible to kill a policy trying to save it? July 3, 2013, the Parliament of the European Union had voted in favour of the Commission proposal for the benefit of "introduce" carbon 900 million to support the carbon price - which has been sinking or less €4 per tonne of CO2 for several months now - by withdrawing (in fact, postponing the release of) a huge amount of quotas. The move was welcomed by green campaigners, renewable producers and utilities who received (all or part) of their certificates for free, but it exposes both the deficiencies of market Europe carbonand its underlying political agenda. To understand why, we need to see how the system works in the first place, and what would be the alternatives.
(ETS) emission trading regime has long been considered major success in European environmental policy. In establishing a pan-European carbon market, it is claimed that the EU has introduced a cost-effective, focused tool on the market to treat climate change. Several objections may be made. Policies on the market to treat these complicated issues such as those involving emissions can be divided into two broad categories: instruments (e.g. a carbon tax) price and quantity (for example, a CAP and trade system). In the first case, the regulator sets a price for the pollutant (ideally equal to its marginal social cost) and the market-i.e., economic agents who must pay in proportion to their own emissions - will find the corresponding, 'optimal' amount of emissions. In the latter, the regulatory authority sets a ceiling on the amount of emissions that can be emitted and a corresponding number of permits is issued. Of market agents shall abandon a number of licenses equal to their own cap at the end of the period (say, one year). If they emit less, they can sell the extra-indemnites to other topics that were not able to reduce their emissions as well. In this way, the burden of reducing emissions is offset where its marginal cost is low, and the market found the "real" price of allowances. In perfect condition, both systems are equivalent: an optimal carbon tax will lead to a quantity of emissions equal to the optimal Cap under a CAP and trade system which, in turn, would be the price to the same level as the optimal tax, emissions. Unfortunately, our world is not perfect, and regulators do not have the information to make an optimal decision. Therefore, the choice between a carbon tax and a CAP and trade system is practical: in conditions of uncertainty, that one is more likely to achieve the expected results? Economists hold that a price mechanism is best when the marginal cost curve is steeper than the curve of marginal profit, while a quantity mechanism is best otherwise. It depends on the consequences in the long term of a suboptimal choice, as well as on the need to reduce later adjustment costs.
When it comes to climate change, it is easy to see that a carbon tax would be a more effective instrument than CAP and trade (of course under the bold assumptions that we must "do something" on the climate and that unilateral action makes no sense at all). The marginal cost of reducing emissions curve is fairly steep, to the extent where it requires the flow of emissions that are produced each year to be immediately reduced. On the other hand, the curve of marginal profit is less steep because it does not depend on traffic, but on the stock of carbon which accumulates in the atmosphere each year.
Despite these common sense suggestions coming from almost all climate economists, the EU has decided to set up a CAP and trade system. A feature of the Cap and Exchange system, is that it is very exposed to the vagaries of the economic climate. Emissions depend on overall energy consumption, which in turn depends on the performance of the economy. If the economy goes wrong, as with the recession in Europe - emissions will fall, because the plants will produce less and people and goods will travel less. But given that the amount of allowed emissions has been (and must necessarily be) fixed in advance, the prices will drop. The reason is very intuitive: recession, no policy climate, is resulting in a decrease in emissions. The fact that the price of allowances does not prove that the CAP and trade system is flawed: it shows that it works correctly in this regard. If the provision of one although it is fixed and demand falls for exogenous reasons, its price must also fall.
At least, it should fall under market conditions. But then, politicians arrived. They realized that the price was not "high enough" (to what?) and introduced the measurement of "concentration". In fact, in a first vote in Parliament rejected backloading, but then he the past with minor changes, under enormous pressure from the Commission and powerful interest groups. The result is almost paradoxical.
From the point of view of the mechanism, backloading is to change cap price will be (and already is) go up, of course. What matters, however, is that the underlying idea is that politicians know what the 'real price' carbon. But if they know the 'real price', it is much more logical to introduce a carbon tax: remember, a CAP and trade system is all about to discover the optimal price!
From the point of view of European credibility, backloading should be major reasons for concern. It shows that the rules can be changed at will, regardless of the strength of the initial commitment was. It is almost irrelevant that Parliament has allowed the Commission to withdraw a limited (but not weak) amount of emission "only once." Breaking the rules involves a cost very high, fatal, the first time that you do this: but once you've taken the step, everyone understands that you're ready to cheat - and behaves accordingly. It's like a flag waved at the lobbyists: he suggests that, if they are pretty convincing, nothing is out of reach.
Finally, from the point of view of environmental policy, this vote should be major reasons for concern. She suggested this design good mechanisms for the results in the long term - which is supposed to be the goal of climate policies - is less important that short-term goals, such as keeping the carbon price high enough to please those that policy took that must - be winners.
The consequence short-term backloading allocations will be more likely to support prices, in accordance with its objective. But its long-term effects could be the one to kill the remaining credibility of European climate policies.
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