Fears that the global economic slowdown will hobble efforts to fund a green transformation of energy systems seem to be well founded.
Governments are putting plans aimed at mitigating carbon dioxide emissions on hold at a time when concerns are focused on finance rather than ecology and when the collapsing price of oil and gas is undermining incentives to invest in renewable energy.
Another blow to the sector is the tumbling price of permits for emitting carbon dioxide, the main greenhouse gas. In countries where emitters must buy these permits, like those in the European Union, low prices mean emitters have fewer incentives to make their production process more efficient or move to less greenhouse gas intensive fuels.
The price of these permits has fallen by more than half since mid-2008 and were trading at 11.63 euros (about $15) by early afternoon on Wednesday, according to Point Carbon.
The downturn in the economy is one key reason these permits are losing their value. Some factories and carbon-belching installations like coal-fired power plants may now have too many – rather than too few – permits. Companies holding the permits and traders have been selling heavily in the past week potentially creating a surplus on markets where these permits are traded.
Another factor in the price drop is the declining cost of less polluting fossil fuels like natural gas. When gas is expensive, energy producers rely more on coal, which emits higher levels of CO2 and boosts demand for carbon permits. When gas is cheap, demand for carbon permits falls.
A further precipitous fall in the price of carbon permits would be an ominous development for European officials who oversee the world’s largest carbon trading system, and who hope that the United States under President Barack Obama adopts a similar system.
Three years ago the nascent E.U. system — begun in January 2005 — virtually collapsed because governments had handed out too many to favored industries. Once carbon traders got wind that there was a surplus of permits on the market, they drove the price down to nearly zero.
Since the last sudden collapse in the carbon price, in spring 2006, the E.U. has done a great deal to tighten up the process of allocating permits by governments in order to prevent a recurrence. E.U. officials have been much tougher with governments by only approving national plans that aimed at ensuring a scarcity of permits to ensure that the permits kept their value.
Moreover, after 2012, the process of allocating permits will be centralized in order to prevent untrammeled lobbying by polluters from influencing the way carbon permits are issued.
Even so, the experience has badly bruised the credibility of so-called cap-and-trade systems as an effective and reliable means of regulating emissions of CO2. Now it looks like the system could be undergoing a second bruising experience – this time triggered by a near-catastrophic global recession.