The EU Carbon Market Perks Up After Years in the Doldrums

Sixteen years ago, Europe introduced a market based on what was then a revolutionary notion: forcing companies to cut greenhouse gas emissions by issuing credits that allow them to pollute up to a certain level. If they spew out more, they have to buy allowances from other companies. If they pollute less, they can sell their extra permits and bank the cash.

This so-called cap-and-trade program, modeled after a U.S. effort to control acid rain, set carbon dioxide limits for more than 11,000 facilities in sectors such as power, paper, and cement (and later, aviation). It was a great idea that helped the European Union overcome a decade-long stalemate on a carbon tax, but it had a fundamental flaw: The permit levels were determined in prosperous times, and there was no plan for reducing supply in the event of a sharp fall in output.