Learning from an economic downturn

The net effect of the economic downturn on carbon emissions is debatable. On the one hand, less economic growth means less flying, less driving, less building, less heating, less steak eating, and generally less carbon emitting. But on the other hand, these things mean cheaper oil, less environmentally considerate investments, and more short-term thinking by consumers and politicians.

There is one less noticed but very important effect of the downturn, and that is the market price of carbon. Since November of 2007, allowance shortfall projections and the price of carbon in the EU Emission Trading Scheme has fallen by 44 %. This makes it substantially cheaper for participants to carry on polluting and punishes those firms that recently invested in reduction technology. It also means that in areas with a functioning carbon market, an economic downturn will necessarily constrain any emission reductions and any carbon-abating investments will come to a quick halt.

In the lead-up to Copenhagen, where the fate of a global carbon market will be shaped, serious consideration should be given to this side effect. Although the next economic recession is the last thing on leaders’ minds, it must not be left out of the Copenhagen debate because we all know that this will not be our last economic recession. I hope that we can learn from it.