Once upon a time, politicians had a good idea for how to create incentives that make companies want to become greener. Companies were to buy certificates for the amount of carbondioxide they emitted – one certificate for every ton. The more carbon – the more certificates they had to buy. The less CO2, the less certificates. So far, so good.

Initially sold for 20 Euros a piece, the price of certificates rose to a record 32 Euros before embarking on a steady decline: At the end of January it dropped to an all-time low of 2,81 Euro. We were wondering what the reasons for and the consequences of this low price  might be, so we’ve asked Christian Linden from the German Emissions Trading Authority to give us some input for our FAQ.

How come the price for emissions certificates is nose-diving so badly at the moment?

At present supply outweighs demand. That’s for a number of reasons: companies were allocated certificates too generously at the start of both, the initial and subsequent trading periods. Plus, the economic and financial crisis has led to a decline in industrial production, which in turn brought about a decline in CO2 emissions. As a consequence companies have accumulated a surplus in certificates, which is now flooding the market, bringing down the price.

Another argument could be that some companies have already became greener, which means they need fewer  certificates (German source).

What happens if the price stays that low?

There is little incentive to invest in climate friendly technology, if it’s too cheap to carry on producing goods in a way that harms our climate.

What can be done to get the certificate prices to rise again?

In the short term, a good idea is what the EU commission has suggested: to temporarily keep a certain number of certificates – they are talking about 900 million – out of the market. In the longer run it’s important that on a political level an ambitious climate goal is agreed to reduce carbon emissions in the EU by 30 percent until 2020.  This would raise the pressure on companies to reduce their emissions.

What’s the “right” price for a certificate?

It’d be a price that motivates businesses to reduce emissions and/or invest in climate friendly technology. For some companies this might start at 15 Euros a ton, fro others it may be closer to 25 Euros. So, here is no single “right” price.