The EU’s plan to sell extra carbon permits is bad for the planet

’ emissions-trading system () is the closest thing the world has to a carbon benchmark. Though it is no longer the world’s biggest carbon-trading market—China launched a national market covering the country’s vast power sector last year—the remains the most ambitious, the easiest to trade and, given relatively high prices, one of the best at encouraging firms to reduce carbon emissions. As carbon markets what happens in Europe sends a powerful signal about whether or not decarbonisation can be achieved through decentralised markets rather than government regulation and spending. So it matters when Europe mismanages its carbon market. A recent decision by the European Commission, the ’s executive branch, to sell more carbon permits is a big blunder. The aim is to raise more cash for a covid-pummelled Brussels. The result will be to undermine Europe’s green credentials. Like a currency, a carbon permit has no intrinsic value. Its price depends on the credibility of the government that issues it and the ambition of its climate goals. If permits are scarce, their price tends to rise and companies are forced to find ways to curb their emissions. If, however, those firms think the rules will be relaxed when times get tough, they have less incentive to invest in carbon efficiency. A steel firm, for example, may hesitate to spend megabucks on a greener production process if it thinks virtue will not be rewarded.