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http://www.ft.com/cms/s/0/329f0798-a762-11e2-9fbe-00144feabdc0.html#ixzz2QpKvqtJe The EU carbon trading scheme needs a serious overhaul The EU’s emissions trading scheme was supposed to bestow global leadership in tackling climate change. In practice, it has long been an embarrassment. A combination of industry lobbying and recession has so swamped the market with permits to emit carbon that prices have slumped and no longer impose any constraint on behaviour. Brussels has tried to bolster the market with half measures. But its bluff was called this week when the European parliament rejected a quick fix that would have propped up prices by postponing the auction of a big tranche of new permits. MEPs rightly refused to court personal unpopularity to no environmental purpose. Much deeper reforms are needed to rid the ETS of its flaws. One is the way that it imposes costs on the production, not consumption, of carbon. This creates bizarre incentives, resulting in the closure of industrial plants in Europe to make way for more polluting ones in Asia. Not only does this seem unforgivably self-defeating at a time when Europe is struggling for competitiveness; it is not even much good for the environment. European nations may be cutting carbon production, but consumption, when imports are counted, has been shooting up – something that spells more pollution, not less. In addition, the focus on production actually thwarts the development of the ETS into a global system – a vital necessity if companies are to be able to compete on equal terms. So first, a mechanism must be found to tax imports from countries outside the system. Second, European leaders need to agree longer-term targets for cutting emissions. Recession has made it easy for the EU to meet its current 2020 targets. A 2030 or 2050 target would help to convince businesses of the need for investment in “green” technologies. Third, the EU needs to deal with the overhang of permits, and find a mechanism to prevent it accumulating again. One idea is to set a time limit, say of three years, after which an unused permit would expire. Another would be to create an independent body with a mandate to achieve cuts of a certain level, taking account of the economic cycle. Whatever it does, the EU must find a way to end the system’s absurdities. If politicians cannot build a system that commands public confidence and creates a credible market, the risk of Europe moving to more coercive measures, or abandoning effective climate policies, will only increase. Continue reading →