Do permit pricing issues spell trouble for Cap and Trade?

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According to a recent news caption in The Economist, The EU has experienced a new all-time low in the price of carbon.  For proponents of cap and trade systems this underlines the potential for unanticipated outcomes resulting from emissions regulation.

The original intent of trading programs was to create an environment where there is “no more free dumping” of greenhouse gasses into the atmosphere.  While a market principled solution seems most appropriate in tackling this issue, this news out of the European Union shows that markets are not always perfect.

It is my opinion, while in principle a disincentive for emitting greenhouse gases can lead to reductions; this situation may have more to do with the actual way the Trading System is set up and monitored, as opposed to indicating that markets are poor tools for tackling this problem.  Supply constraints may help get this program back on track but from the news caption it was unclear what prompted the glut in emissions permits.


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