Some more thoughts on the EU ETS backloading debate

I’ve been struck by how a number of the framings of the backloading (withdrawing European Union Allowances  – EUAs – from the system for a specific period of time) debate re the EU ETS have attempted a ‘depoliticising’ move – have in effect argued that what the failure of the EU ETS (so far, it’s coming back to the EU parliament later on this month) to agree to backloading should be interpreted to mean that decisions about the EU ETS should be taken out of the politicians and put into the hands of ‘competent’ technocrats.

Katherine Lake at the University of Melbourne, for example, argued that we need a “carbon bank“, to make decisions about the allocation of EUAs, instead of the European Parliament. It would operate along similar lines to an independent central bank for the supply of money: given a specific target (like the inflation targets most central banks work to) and then left to manage the availability of carbon allowances to meet that target. The Carbon Markets and Investors Association (CMIA), the lobby group for carbon traders, were more explicit and took to Twitter to argue that the EUETS “should be in the hands of a professional independent Carbon body not MEPs”.

What seems to me to be going on here is a shift in how carbon markets are understood to operate. In this framing, the carbon market becomes an end not a means. It becomes understood as something that is first and foremost a market, and should operate according to the “normal” function of other markets. Prices should be determined by supply and demand, and where prices collapse (as they have since the recession), this implies some sort of disequilibrium in the functioning of the market that needs to be corrected.

But of course carbon markets are artifices in the extreme. Perhaps no markets are “natural” in the sense that Adam Smith understood them (as the reflection of the “natural propensity to barter and truck”) but carbon markets more than perhaps any other arise not out of a “spontaneous” formation amongst buyers and sellers, but as a specific regulatory intervention designed to reduce GHG emissions. The official economic rationale is that if they work properly they do so at the lowest overall cost to society.

But this means that first and foremost, carbon markets are means, not ends. They are there to help achieve GHG reductions, anything else is secondary. They may in fact be useless at doing this, in which case they should be abandoned (as many critics of carbon markets argue powerfully).

But this means that the backloading debate should not be understood as about the “proper functioning of the market”, and thus depoliticised via the establishment of a carbon bank. In effect what occurs in the carbon bank proposal is that the target that such a bank would be asked to achieve is not a specific GHG emissions reduction target but a carbon price target (in which case you might as well simply have a carbon tax). In a cap and trade system, the aim is for a specific reduction in GHG emissions, not a specific carbon price. So to backload, or withdraw allowances from the system, is to increase the ambition of the overall climate policy target.

Now this would be an excellent thing, and as I have argued elsewhere, one of the advantages of a cap and trade system (they have many flaws) is that in a recession it creates pressure for making climate policy more ambitious (whereas with a carbon tax the pressure would go the other way) but it is anything but a simple managerial or technical matter. It goes to the heart of our collective decisions about climate change policy. To think otherwise is to treat carbon markets as ends in themselves, which in effect is to treat the pursuit of the interests of the carbon traders (who want high prices to generate demand for hedging instruments) or some of the regulated firms (electricity generators who are net sellers of EUAs, for example) as the primary goal of the policy. It is highly useful that such actors see benefits of climate policy, as it helps sustain the legitimacy of climate policy. But the basic goals of the policy – the overall level of ambition in emissions reductions, should be kept in the hands of open political debate.


1 Comment»

  Yiombi wrote @

Thank you. It seems interesting

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