When prices for emissions allowances collapsed in Europe’s carbon market a year after trading began, critics said the collapse proved a regulatory product couldn’t be traded internationally. Sure, they said, the U.S. acid-rain market worked, but it was never an international market—and it couldn’t be, given the propensity for governments to protect their own economies.
That’s what happened in Europe, when EU member states overestimated their future carbon emissions, creating more allowances than their industries really needed. Rampant sandbagging virtually guaranteed carbon prices would collapse, as they did in early 2006. Since then, Europe’s carbon prices have recovered to only about 15 Euros per ton—below their €33 high before 2006, and far below the U.S.$50/€$36 a ton that many analysts consider the minimum necessary to begin the low-carbon revolution.