A Carbon Trading Market Perks Up

Sixteen years ago, Europe introduced a market based on what was then a revolutionary notion: forcing companies to cut greenhouse gas emissions by issuing credits that allow them to pollute up to a certain level. If they spew out more, they have to buy allowances from other companies. If they pollute less, they can sell their extra permits and bank the cash.

- By Ewa Krukowska

This so-called cap-and-trade program, modeled after a U.S. effort to control acid rain, set carbon dioxide limits for more than 11,000 facilities in sectors such as power, paper, cement, and, later, aviation. It was a great idea that helped the European Union overcome a decade-long stalemate on a carbon tax, but it had a fundamental flaw: The permit levels were determined in prosperous times, and there was no plan for reducing supply in the event of a sharp fall in output.

When the global economy went into a funk in 2008, emissions plummeted, sending prices for permits into a tailspin. The problems were aggravated by imports of cheaper credits from outside the region issued under a carbon-reduction program overseen by the United Nations. By 2013 the cost of emitting a ton of carbon had tumbled from a pre-crisis high of €31 ($38) to just €2.50.