Though once believed to be a good balance between economic development and environmental protection, the Europe Union’s carbon trading system is now facing a plunge in carbon prices.

Point Carbon, a carbon market analysis company, reported that the carbon price fell to 14 euros per metric ton in the first two months of 2010. This drop affected the carbon trade, as the price is too low to be an incentive to power plants and heavy industry corporations to cut down on their carbon emission levels. 40 euros per ton is the floor price at which carbon trade can induce companies to either advance their emission machinery or look for alternative energy sources to reduce carbon emissions, and the current price is way below that. Thus, this pricing situation compromises the EU’s goal of reducing carbon dioxide and global warming.

The carbon trading system, launched on Jan. 1, 2005 by 15 European Union member states in response to the Kyoto Protocol and also known as cap-and-trade, has been a great success so far. In the year of its launch alone, 362 tons of carbon were traded. In this system, companies are limited to a certain limit of carbon emissions and if they exceed that limit, they can buy more carbon credits from a company that hasn’t used up its permitted amount. In that way, a company has the choice of either cutting down the amount of carbon emitted using innovative technology and alternative energy or buying more carbon credits. According to Jen Christiansen, who teaches environmental economics at Mount Holyoke, “this system figures out the cheapest way to reduce carbon emission.”

The failure of the Copenhagen climate conference in December to come to any specific agreement on carbon reduction resulted in the falling demand for carbon credits in 2010. The Copenhagen conference originally set as a goal carbon reduction that would increase the demand of carbon trade. However, no further pressure was put on the market. What is more, the economic downturn led to a continuous drop in carbon price.

According to Christiansen, carbon dioxide reduction is an international problem that requires global collaboration to construct a feasible framework. The United Nations has been working toward this goal through a series of summits and discussions starting from the Kyoto Protocol to the latest Copenhagen conference. But though well developed in Europe, the carbon trade system is not always an applicable solution for carbon reduction in other countries.

Christiansen noted that carbon tax, a less complicated and fairer system, might be a more effective and practical incentive to cut down on carbon dioxide. Proposed in 2007 by Tufts economics professor Gilbert Metcalf, carbon tax is combined with a reduction in the payroll tax, thus encouraging companies to either pay the tax or to reduce their own emission levels.

In Europe, where more politicians are aware of the destructive effects of carbon dioxide on climate change, the carbon trade system has been a successful policy. The question now is how can the EU preserve the system’s original goal?

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