You may be vaguely aware that an enormous hullabaloo has broken out in Europe over the one-year-old carbon-trading market — the primary mechanism by which the EU plans to meet Kyoto targets. Because you are not paid to read boring stories, and I am, let me summarize it for you.

The carbon-trading market covers some 9,000 industrial facilities across Europe. Each participating government allocates a certain amount of CO2 emissions to each of its facilities. If those facilities emit less, they can sell their emissions credits. If they emit more, they have to buy credits. (The initial allocations cover 2005-2007.)

So, two things recently happened that sparked the hubbub:

  • 21 of the 25 participating countries came in below their initial targets (Lithuania by 70%!), leaving an enormous 70.5 million ton (or as they say on the continent, 64 million "tonne") surplus. (Interestingly, the UK was one of the few countries to exceed its target.) Now, you might think this is good news. They’re reducing emissions, right? Well, not so much. Consensus opinion seems to be that industry gamed host governments into vastly high-balling the allocations, meaning facilities could get (and sell) credits without making any particular energy-efficiency efforts. So industry’s been enriched, and CO2 emissions haven’t fallen significantly. Oops.
  • To make matters worse, the data was accidentally put on the EU Commission’s website (?!) well before the official release date. On news of the huge surplus, prices for credits plunged by 72 percent in three weeks (ouch!). The market, having reached a high of $265 billion, abruptly lost two-thirds of its value. Double ouch. Since credits are all but worthless now, some companies and countries are threatening to abandon the whole scheme.

I don’t know a ton about it, but my sense is that these are predictable growing pains. I suppose it was to be expected that industry would try at the outset to game the system and establish low expectations. But now governments are under twice the pressure to crack down, and they have reliable baseline emissions estimates. Hopefully the market will recover equilibrium. It’s not a huge exaggeration to say that international efforts to fight climate change hinge on it.

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The best stories I found on this mess were Bloomberg, Times, and NYT.