Since 2005, air in the European Union has no longer been free. Any business or industry that emits so-called greenhouse gases into the atmosphere has to pay for them in the form of emission certificates which, in turn, are traded on energy exchanges.

Basically, it is a clean solution, says climate expert Stefan Krug from Greenpeace. In practice, however, the price per ton of carbon dioxide (CO 2 ) is currently 6.50 euros, or roughly $8.12, and unfortunately the European Union had expected the price to be around 20 euros. "That means all the planning doesn't work right now," said Krug.

The price is so low, in fact, that the Bavarian exchange stopped trading emission certificates at the end of May. "The volume traded on European exchanges in recent months has dropped drastically to nearly zero," the Munich-based bourse said in a statement.

CO 2 trading as a regulator

The economics of CO² trading don't work right now, says Krug

The idea behind certificates is to regulate CO 2 emissions. The EU hopes to reduce emissions by 80 percent from 1990 levels by the year 2050. To achieve that goal, the EU introduced emission certificates in 2005. The concept gives industry and the energy utilities a certain number of pollution rights, quantified in tons. If a company emits more than the basic amount, it can buy certificates. By contrast, a company that sharply reduces its emissions – for example, by switching to more climate-friendly production methods – is rewarded with the possibility of selling its excess and unused emission ceiling for a profit.

If, however, the price of certificates drops, businesses have less incentive to cut their emissions because they can't earn enough from selling certificates to offset investments in renewable energies or climate-friendly production.

The price has dropped, for the most part, due to certificate giveaways by the government, says Krug, adding that half of all certificates have been distributed free of charge. "This has led to a huge mountain of certificates that companies can't get rid of," he notes, "and accordingly, the incentive to save CO 2 is low."

Resistance in the EU

New proposals are coming from the EU this year, says Hedegaard

EU Climate Commissioner Connie Hedegaard has announced that she will present proposals by the end of the year on reforming emissions trading. But even within the EU there is opposition to cutting back on the number of certificates to breathe life into the market. In particular, Poland, which generates 80 percent of its electricity with coal-fired power plants, is strongly against any such measure.

Energy intensive industries share the Poles' view. Hans-Jürgen Kerkhoff, president of the German steel manufacturers' association WV Stahl, wrote recently in the Frankfurt Allgemeine newspaper that emissions trading would "lead to deindustrialization." He warned that Europeans were not competitive because they were the only ones paying for their CO 2 emissions.

China plans to join

That could change, however. China has said that it is planning to introduce a national CO 2 emissions trading scheme next year. Initially, certificates would go on sale in five cities and two provinces in a test phase. Industries in the cities of Beijing, Shanghai, Chongqing, Shenzhen and Tianjin, and the provinces of Guangdong and Hubei, would have to buy pollution rights. Some 250 million people live and work in these economic zones. If the test-run works well, emissions trading would be introduced nationwide in China in 2015.

China plans a test run for emissions trading in 2013

Australia, South Korea, the US state of California and the Canadian province of Quebec have also announced their intentions to start emissions trading. But mostly China, which for a long time resisted binding climate rules, could bring a turnaround to the international CO 2 market. Experts hope that such a broad market would then drive investments in climate-friendly technologies.

Certificates instead of taxes

The climate could already benefit from emissions markets in China, Australia, South Korea, California and Quebec. More than 40 percent of global emissions would be regulated by CO 2 trading with these areas. EU emissions account for about 14 percent of total greenhouse gases.

For such a market mechanism to function properly, however, the CO 2 price would have to be high enough. The alternative, says Stefan Krug of Greenpeace, would be a CO 2 tax. But that would be more difficult, he admits, because tax issues are regulated at the national level. Besides, with taxes there is no guarantee that the money would actually be used for climate-friendly projects.

Author: Helle Jeppesen / gb

Editor: Ben Knight