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EU messes up carbon trading markets

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BBC news article on the fiasco (and 1 billion! windfall from carbon emission trading:

"Part of the problem, he said, is that firms have been given, free-of-charge, the carbon emissions permits on which the scheme is based. This, he explained, is like the government giving energy firms free money."

I'm really interested in the potential of carbon trading - it seemed like the perfect use of market based economics to assign a true, immediate cost to emissions. I think this has been launched successfully in the States, I know it was an American economist who devised the idea.

On the face of it, even the EU's implementation seems to work, or rather the incentives have worked:

"If a firm can cheaply cut its pollution by installing better technology it will have carbon permits to spare...if another firm is overshooting its pollution limit it will need to get hold of extra allowances. The firms can then trade carbon permits on the EU market.

Economists like it because it gives maximum pollution savings at least cost. But a true market scheme would see the permits auctioned, not given away by governments.

The system means that generators using high-carbon fuels like coal need to buy extra carbon permits.

That forces up the price of electricity overall, which benefits generators using low-carbon fuels like nuclear and gas. This is where the power firms have made their windfall profit."

Doh! Government have been lobbied, the French have over-subscribed and they've all given away the permits, creating a crash in the 'value' of carbon trades.

Try creating a financially robust market environment where the key players are able to lobby to be given the traded commodity for free - what a debacle.

On the other hand, I'm not sure I've got too much of a problem with low carbon power generator companies making money - surely that incentivises energy production to move into those areas?