On July 3, 2013, the European Parliament approved a measure that would help rescue the emissions trading system. In 2005, the emissions trading system was designed to reduce carbon pollution by 2.8 billion tons by 2020. The system sold permits to companies that would allow them to produce greenhouse gases. Every year a cap of pollution would be set that companies could produce. Every year the cap got smaller and permits became more expensive so that companies would be influenced to switch to green technologies and reduce pollution waste.
Since the beginning of this system, the worldwide economy faced recessions. Due to the economic downturn, the European Union became generous to companies and oversupplied the market with 2 billion permits. With an increase in supply the tax for pollution went down to about 2.5 Euros. The European Union initially estimated that a tax of 30 Euros per ton of carbon was needed to influence companies to switch to green technologies. In July, the European Parliament adopted a measure called “backloading” that would decrease the supply of permits by 900,000,000. With a decrease in supply the price of the tax should go up. The market reacted immediately following the decision. The market tax for pollution rose to about 5 Euros. There is still about 1 billion surplus in the market.
I believe the positive to this system is that companies are producing less pollution. The impact would be greatly felt unless the extra 1 billion permits are also withheld from the market. A 5 Euro tax on pollution does not give enough incentive for companies to switch to green technologies. This system could have more negative effects. With increase in the tax, companies have to reallocate funds and invest in more physical capital. Unemployment might rise because companies don’t have money to pay employees. Some of these companies also might be able to sustain themselves because the tax is too high forcing them to shut down. More aggressive measures are needed in order to rescue the European emissions trading system.