Carbon Caps Not Working As EU Hoped

London — As the centerpiece of Europe’s pledge to lead the global battle against climate change, the region’s market for carbon emissions effectively turned pollution into a commodity that could be traded like gold or oil. But the once-thriving pollution trade here has turned into a carbon bust.

Under the system, 31 nations slapped emission limits on more than 11,000 companies and issued carbon credits that could be traded by firms to meet their new pollution caps. More efficient ones could sell excess carbon credits, while less efficient ones were compelled to buy more. By August 2008, the price for carbon emission credits had soared above $40 per ton — high enough to become an added incentive for some companies to increase their use of cleaner fuels, upgrade equipment and take other steps to reduce carbon footprints.

That system, however, is in deep trouble. A drastic drop in industrial activity has sharply reduced the need for companies to buy emission rights, causing a gradual fall in the price of carbon allowances since the region slipped into a multiyear economic crisis in the latter half of 2008.

In recent weeks, however, the price has appeared to have entirely collapsed — falling below $4 as bickering European nations failed to agree on measures to shore up the program.

The collapsing price of carbon in Europe is darkening the outlook for a greener future in a part of the world that was long the bright spot in the struggle against climate change.

It is also presenting new challenges for those who once saw Europe’s program as the natural anchor for what would eventually be a linked network of cap-and-trade systems worldwide.

Carbon “started as the commodity of the future, but it has now deteriorated,” said Matthew Gray, a trader at Jefferies Bache in London and one of a diminishing breed of carbon dealers in Europe. “Its future is uncertain.”

The problems plaguing Europe’s cap-and-trade system underscore the uphill battle for international cooperation in the global-warming fight. After middling progress at various summits, officials from more than 190 countries have been charged with forging a global accord by 2015 aimed at cutting carbon emissions. But critics point to the inability of even the European Union — a largely progressive region bound by open borders and a shared bureaucracy — to come together on a remedy for its cap-and-trade system as evidence of how difficult consensus building on climate change has become.

Negotiations to launch a similar system across the United States collapsed in 2010, replaced with a regional approach in which California, for instance, moved forward with its own program.

Aided by a boom in cheaper and cleaner shale gas as well as the spread of more renewable energy sources, including wind and solar, the United States has — like Europe — nevertheless managed to keep reducing its overall emission levels.

But there are also signs that after years of growth, investment in clean energy is ebbing on both sides of the Atlantic.

In 2012, overall clean-energy investment in the United States fell 37 percent, to $35.6 billion, compared with a year earlier, according to a new report by the Pew Charitable Trusts.

Such investment also fell in European countries, including green leaders such as Germany, leading analysts to call the problems with the region’s cap-and-trade system that much more troubling.

“Obviously, what’s happening now is very disheartening for people who have been involved in trying to cut carbon emissions,” said Agustin Silvani, managing director of carbon finance at Conservation International in Arlington, Va. “The European system was at the center of the global fight, and the fact that it is collapsing is definitely a blow. Maybe a moral one more than anything else.”

The cap-and-trade program is based on a system of carbon allowances for large emitters such as utilities and manufacturers, with some bought and others awarded free. Companies are allowed to draw on global mitigation projects — such as planting trees in tropical rain forests — to offset a small portion of their emissions. But for the most part, they must meet targets through carbon credits issued by European authorities.