What's the long-term impact of the EU’s carbon market crisis?

What's the long-term impact of the EU’s carbon market crisis?

The European Union’s new plan to shore up its Emissions Trading Scheme (ETS) following a plunge in carbon prices underscores just how volatile – and vulnerable – the carbon emissions trading market has become.

Battered by global economic uncertainty, an overuse of allowances and political polarization, the ETS will probably remain in limbo until at least September. That’s when the EU’s climate change commission next meets.

“The Commission aims at having all the necessary political decisions taken before the end of the year,” said commission spokesman Isaac Valero-Landron. “We have delivered the proposal before the summer break and now it’s up to member states and the parliament to deliver as soon as possible.”

The question, however, is whether any lasting damage has been done to the carbon emissions trading market. “It’s very difficult to be sure,” said Rebecca Henderson, professor at Harvard University and co-director of the Business and Environment Initiative at the university's business school.

“In the short term there will be less interest in reducing carbon emissions, because the price of doing so has been shown to be lower. So to the extent that people were responding to the need to buy permanence, that force will be removed," she said. "I think in the longer term there will be questions about the viability of carbon trading and the mechanisms that the Europeans in particular adopted.”

One possible consequence, according to Henderson, is governments and corporations becoming more aware of the dangers of mismanaging carbon allowances and permits -- which could force a rethinking and eventual restructuring of these markets.

Photo of coal power plant smoke stacks by V.J. Matthew via Shutterstock.

But all this news doesn’t mean carbon emissions trading is going away – or even scaring off investors.

In the United States, with its noticeable lack of government regulations on carbon emissions, energy-related carbon emissions have dropped significantly over the past five years.

That data is due in part to the growing number of U.S. companies investing in green technologies – and understanding the benefits those technologies have on their bottom line.

Henderson said that a wide variety of firms have discovered that reducing carbon emissions and reducing their energy use has an immediate payback. “And I think that understanding is becoming more widely diffuse," she said.

She points to Kohlberg Kravis Roberts (NYSE: KKR) as a prime example. The global investment firm has green programs in place for whenever they buy a new company. “They roll out immediately consultants and techniques to look at carbon and water reduction,” Henderson noted. “They’re doing that because they believe it has immediate financial returns.”

And it’s unusual these days, she said, to find commercial real estate investors who aren’t thinking hard about a new building’s environmental profile during its planning and development phases. Combine those economic incentives with growing consumer interest in sustainability – along with a willingness to look at long-term effects -- and “there’s a lot of activity in this space,” said Henderson. “I think regulatory movement would be enormously helpful in catalyzing and accelerating it.”

For now, however, the deepening economic crises in Europe and election-year politics in the U.S. are probably taking their toll on the implementation of carbon trading.

“A couple of years ago, when I talked to businesspeople about this, they expected a price for carbon and widespread carbon trading within five years,” Henderson said. “Now the number I hear is more like 10 or 15.”