One of the most effective steps to reduce emissions would be to switch from coal-fired power generation to gas, which produces about half the emissions.
One failure of the European Union’s emission trading scheme (EU ETS) has been that emissions allowances are not expensive enough to make it more attractive to invest in cleaner fossil fuel sources.
The price that an emission of one tonne of carbon would need to be to make gas-fired power generation more attractive than coal is called the fuel switching price of carbon.
At current market prices, the fuel switching price of a tonne of carbon would have to be 40 euros ($50) to make gas more attractive than coal-fired power generation. The actual price for CO2 emissions is less than 7 euros ($9) a tonne.
Yet an equally big, if more hidden, failure of the EU ETS has been that there are too many market variables (for example the foreign exchange market) at play to make emissions consistently expensive enough to allow the long-term investment decisions needed for fundamental changes in the way electricity is generated.
The implications of these variables on fuel switching price of carbon are huge, ranging from 9 euros ($11) a tonne at the euro’s historic low versus the dollar to 50 euros ($62) for its historic high (the coal market is dollar denominated).
Current euro/dollar rates of about $1.25 give no incentive at all to switch to cleaner fossil fuels.
Swings in gas and coal prices are equally large, (Fukushima, Arab Spring etc.) meaning that a reliable fuel-switching price for carbon is impossible to calculate.
Critics of the EU ETS are therefore increasingly calling for simpler alternatives to push for cleaner energy sources, such as government subsidies and regulation.