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Apartment buildings, with some of their windows lit, stand along Leipziger Strasse in the city center at twilight in Berlin, Sept. 8.
Photo:
Sean Gallup/Getty Images
Europe is bracing for an unprecedented energy crisis this winter, and Russia’s war in Ukraine is as much to blame as European politicians say. What they don’t want you to know, however, is how their own climate-change policies are making everything worse. We’ll explain, since they won’t:
Like prices for fossil fuels, CO2-emissions permits in the European Union’s emissions-trading system (ETS) have skyrocketed in price. A certificate to emit one metric ton of CO2 now costs about €80 and last month nearly hit €100, up from €25 in late 2019. The rising emissions price translates into higher costs for electricity consumers, as well as a squeeze for industries already scrambling to absorb sky-high fuel prices.
Europe has operated the ETS since 2005. Mandarins issue a set number of permits each year, and then market participants can trade the permits so heavier emitters can buy the certificates they need from those who have reduced emissions. If demand exceeds supply, a rising permit cost is supposed to encourage green investments to reduce emissions.
The system wasn’t designed with a crisis such as this year’s in mind, however. One factor driving up permit costs is a shift in the fuel mix driven by political supply constraints rather than the kind of market incentive the ETS is supposed to change.
Amid a shortage of natural gas, European countries are turning to dirtier coal to generate electricity, driving up the demand for ETS permits and thus their price. Utilities could use nuclear to reduce their reliance on coal, or governments could encourage more domestic gas exploration. But Europe’s obstinate political resistance to those options is contributing to higher ETS permit costs.
Brussels has also created an artificial scarcity of ETS permits. Regulators should be agnostic about the permit price in a trading system, since the point is to set a target level of emissions and then let the market price that quantity. The quantity of carbon emitted in Europe has fallen with the ETS in place—by 41% for emissions covered by the trading system between 2005-2020.
But almost from the start, politicians and green activists worried the price of an emissions credit was “too low.” The complaints grow louder if the cost of a certificate is below €10, as it was for most of the mid-2010s. This led to the creation in 2019 of a “market stability reserve” to absorb hundreds of millions of unused carbon credits on top of the gradual reduction in new credits linked to Brussels’s more aggressive climate targets.
This has created the relative scarcity of permits that’s now driving up the price. Politicians, activists and bureaucrats justified their meddling on the basis that too low a price for permits wouldn’t encourage enough investment in greening Europe. But cheap permits were sending a market signal that Europe was meeting its carbon targets anyway so investment could better be directed elsewhere. This was a germane point after 2010 when an economic downturn suppressed emissions and Europe desperately needed productive investment in something other than green boondoggles.
Now Brussels’s ETS meddling means the economy can’t “borrow” carbon karma from previous years to tide Europe over this winter’s crisis—at the same time politicians keep blocking investments in nuclear or gas production that would get the Continent back on the carbon straight and narrow.
Some politicians are starting to get it. Polish Prime Minister
Mateusz Morawiecki
told the Financial times recently he’d support scrapping the ETS for a year or two. But such insight remains as scarce as affordable energy in Europe and until other leaders clue in, Europe’s backdoor carbon tax will continue to bite.
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