It happened in Europe earlier this year — for the second time. And now it has happened again.
The biggest carbon trading scheme in the United States has collapsed. Prices for the schemes carbon permits plummeted 33% at a September 9 auction.
The "right to pollute" has never been more affordable. Energy companies and market speculators can buy a tonne of carbon for less than the cost of a cup of coffee.
The Regional Greenhouse Gas Initiative (RGGI) is a government regulated cap-and-trade scheme that involves 10 states in the north-east of the US. It was set up with the modest promise to cut greenhouse gas emissions by 10% of 2005 levels by 2019.
Like similar carbon trading schemes, including the proposed Australian version, the RGGI sets a "cap" on the total emissions allowed. It issues a set number of permits within that cap.
Companies, brokers and individuals are allowed to buy the available permits off the government and "trade" them to one another.
The theory is that companies who pollute more will need to spend more on buying permits, which will encourage them cut fossil-fuel use and invest in renewable alternatives.
But with the RGGI, the "cap" on emissions has been set higher than what the actual emissions will be. It's a "cap" that doesn't cap anything.
Rather, the low cost gives an incentive for companies to pollute more in the short-term and prices renewable energy alternatives out of the market.
Carbon market analysts Point Carbon have predicted the bogus cap will stay higher than actual emissions for the next five years, the Wall Street Journal's Environmental Capital blog said on September 9.
Just like the European scheme, the 10 states allocated far too many permits, causing the price to free-fall.
In Europe, February's fall in the price of pollution permits to 10 euros was enough to make energy from coal and gas far cheaper than renewable alternatives. The World Wildlife Fund called it "a disaster".
At the RGGI auction, permits fell to only US$2.19, the September 11 New York Times said. It dropped from $3.23 in June. In March, the permits sold for $3.51.
Part of the reason for the over-allocation is the economic crisis has reduced demand for electricity, leading to fewer emissions than state authorities had predicted.
With permits now flooding the market, carbon trading will help polluting industries stay in business for longer.
But don't expect the authorities to reassess permit allocations anytime soon. The NYT said no review of the scheme is planned until 2012.
Under the RGGI, investors are also able to take a punt on the carbon futures market. Carbon permits for 2012 were sold at the bargain-basement price of $1.87 each, down from $2.06 three months ago — hardly an incentive for business to phase out fossil fuels rapidly as climate scientists urge.
The scheme's backers say the environment is still a winner from the scheme. Revenue raised by the auctions is used by state governments in energy efficiency programs and for clean energy research.
But the carbon market crash means this revenue is drying up.
The September auction pulled in about $66 million — almost half the $117 million raised in March.
On September 11, Point Carbon analyst Emilie Mazzacurati told Associated Press: "It's been quite a bit of a drop.
"It's basic supply and demand. Right now there's more supply than demand, so prices are going down."
But RGGI chairperson Pete Grannis wouldn't have a bar of it. Faced between admitting the scheme was in crisis or bluffing, Grannis chose to bluff.
"Once again the RGGI auction was a success, with demand running much higher than supply", he said on September 9.
"In its successful first year", he said, "RGGI has established a market for carbon, demonstrated that auctions are an efficient and effective way to allocate CO2 resources and enabled states to return millions of dollars in benefits to consumers through investment in energy savings and clean energy."
Yet no significant cuts in greenhouse gas emissions were made under the scheme, or are likely in the near-term.
With carbon trading successes like this, who needs total fiascos?
The collapse of yet another carbon trading scheme should give pause to those who hope against hope that the Rudd government's planned Carbon Pollution Reduction Scheme will be "better than nothing".
The experience of carbon trading schemes has been that they don't work to cut emissions quickly and make it harder to implement the real solutions to dangerous climate change.
The environment doesn't benefit, but commodity traders, financial speculators and energy companies do.