Why Reports of the “Death” of Cap-and- Trade Are Premature

While cap and trade is all but dead in Washington for the foreseeable future, it is being embraced by local, national and regional governments around the world. The European carbon market finished its highest year of trading in its five-year history, while several other countries are considering similar cap and trade proposals. China and Australia have just announced plans to launch aggressive emissions control programs at the national level. And states and municipalities, led by California, Tokyo, and the RGGI states, are moving forward as well. However, the rise of new players with divergent interests will lead to challenges in coordinating carbon trading, creating the potential for higher costs and trade tensions. This GR Energy and Climate Brief explores the current state of cap and trade systems, highlighting several advances that may have slipped under the radar, and demonstrates that cap and trade is anything but a dead issue.

International Mechanisms are Alive and Growing

Despite the global economic downturn, carbon markets have continued to grow. Total volume of carbon trading reached $144 billion in 2009, up 16% from 2008, with predictions 2010 numbers could grow as much as 33% and reach $170 billion by the end of the year. The European Union Emission Trading System (EU ETS) controls the largest segment of this market by far, accounting for 73% of trades and 83% of sales. The market suffered early on due to an over allocation of permits that sent the price of emission credits to near zero. But prices have since stabilized, hovering around €14 over the past year, and the market is expanding in scope: by 2012, the market will incorporate aviation emissions and will link its market with that of Switzerland. Given the time and political capital spent in constructing the EU ETS, chances of the market dissolving in the near future are slim.

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