The fragile credibility of cap-and-trade markets

This isn't fresh news, but it's a powerful illustration of how sensitive cap-and-trade systems are to loss of political credibility. The SOx cap-and-trade market was a long-standing success story and talisman for those who sought to establish a similar, broader system for GHG emissions to curb climate change.

2005:

The current problems in the acid-rain market stem from 2005, when the EPA, with the backing of many utilities and environmental groups, announced major new reductions in smog-forming and soot-producing emissions, and expanded the reach of the cap-and-trade system in more than two dozen, mostly Eastern, states.

2008:

In response to lawsuits filed by a handful of utilities and North Carolina, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the EPA had overstepped its authority...

In response to the ruling, prices for the pollution allowances plunged to $130 a ton. Utilities held off on projects to clean up their plants.

2010:

Last week, the EPA issued new rules to comply with the court's decision. The new program will limit the use of the market and instead require most of the emission reductions to come from changes at the plants themselves. And millions of allowances that utilities now hold can't be used under the new program, which will issue its own allowances.

And unsurprisingly, prices have now fallen to essentially zero. A powerful cautionary tale.