By Mary Louise Kelly

MARY LOUISE KELLY, HOST:

Here in the U.S., many power companies and manufacturers have little idea about how much carbon they emit. Whereas in Europe, they know exactly how much. That’s because they have to pay for it. It’s known as a carbon market. The idea is to give businesses flexibility by letting them buy the right to pollute instead of having the government set limits on each power plant or factory. Businesses bid against each other for these pollution rights because there are only so many for sale. And now the price of carbon is going up. Michael Greenstone directs the Energy Policy Institute at the University of Chicago. Here’s how he explains the jump in price.

MICHAEL GREENSTONE: I think we’re swinging out of the COVID recession and there’s tons of economic activity going on around the world, and that’s leading people to drive more, buy more things and use more power. And so what it means is that there are more people competing for a fixed set of allowances, and that causes the price to go up.

KELLY: The price of carbon recently hit 90 euros a ton in Europe. It could hit 100 euros by the end of the year. Greenstone says those rising prices incentivize polluters to pollute less. They also present an opportunity for companies that make green technology.

GREENSTONE: They send a signal to firms, hey, come up with a new idea on how to produce energy with less carbon or to pull carbon out of the atmosphere or to bury it as it comes out of the smokestack. And right now, that price signal is, you know, largely not present around the world, and higher prices send a much clearer signal. I expect if we had consistent carbon pricing, they would pave the way to kind of a golden era of innovation in climate.

KELLY: So, in a way, is this carbon markets doing exactly what they were designed to do? They’re supposed to make it financially attractive for companies to pollute less. If it’s costing a company more to pollute, that’s the market kicking in and doing exactly what it was designed to do.

GREENSTONE: You know, it’s in the heart of every economist that rather than having government dictate to plants or to industries exactly how they reduce their carbon emissions, that there be this price signal and then that can set off creative ideas and innovation and looking for new ways to cut carbon. But the key thing is that in the places that have these cap and trade markets, the level of CO2 emissions is fixed.

Continue Reading at NPR..

Areas of Focus: Energy Markets
Definition
Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Fossil Fuels
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Fossil Fuels
Under current policies, fossil fuels will play an important role in the energy system for the foreseeable future. EPIC research is exploring the costs and benefits of these fuels as...
Climate Change
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Climate Change
Climate change is an urgent global challenge. EPIC research is helping to assess its impacts, quantify its costs, and identify an efficient set of policies to reduce emissions and adapt...
Climate Law & Policy
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Climate Law & Policy
As countries around the world implement policies to confront climate change, EPIC research is calculating which policies will have the most impact for the least cost.