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.

Next page: Is carbon trading fading?