The Union set up the E.T.S. in 2005 to send a clear signal to electric utilities and other polluters that over time they needed to switch to cleaner energy sources and adopt innovative anti-pollution technology. But current prices, the equivalent of less than $7 a ton, are too low to encourage much of anything.

“The European Union’s energy and climate policy is in disarray and risks losing credibility,” said Kash Burchett, an analyst at IHS, an energy consulting firm in London.

Some hope for shoring up the system came Tuesday, when the environmental committee of the European Parliament voted to allow the European Commission to reduce the number of permits it auctions in the next three years.

“This was a lifeline for the carbon market and for emissions trading as a policy tool for curbing emissions,” said Stig Schjoelset, head of carbon analysis at Reuters Point Carbon, a market research firm in Oslo.

Under the E.T.S., polluters like utilities and steel companies are allocated some carbon allowances. They buy more permits at auction if they need them. If, at the end of the year, they do not have enough permits to cover their emissions, they face heavy fines. The total number of permits is scheduled to tighten each year, and the proportion of credits that companies must pay for, rather than receive free, is also supposed to rise. The intended result of this system is that carbon will be progressively squeezed out of the economy.

But amid Europe’s economic malaise, many companies have chopped back production, leaving them with excess allowances. Demand for steel in Europe, for instance, is down about 30 percent since 2007, leaving steel makers like ArcelorMittal with allowances to sell. Last year, ArcelorMittal sold 21.8 million tons of its credits for $220 million. The company says it applied the receipts to energy-saving projects.

Low carbon prices do provide some relief to industry in grim economic times, but they do not provide much incentive to switch to cleaner fuels or invest in expensive technologies like carbon capture and storage, a process for removing CO2 from a plant’s emissions and pumping it underground.

In fact, current low carbon prices allow utilities to mothball power plants fired by natural gas, which is expensive in Europe, and instead burn coal, which is now cheap but produces far more pollution.

Mr. Schjoelset, of Reuters Point Carbon, figures that a carbon price of €30 to €40 per ton is needed to encourage utilities to switch from coal back to gas, while €60 to €150 per ton may be required to promote the adoption of carbon-capture technology.

“We need a higher carbon price today for a long-term fundamental shift toward greener production in Europe,” he says.

But industrialists and others warn that higher costs and uncertainty could further reduce the level of investment, which has already dropped in recent years, according to the European Union.

“We are not able to plan because we do not have a stable legal environment,” said Wolfgang Eder, chief executive of Voestalpine, an Austrian steel maker. “On the CO2 issue you have new intentions every year.”

Given industry’s desire for predictability in carbon policy, perhaps the most important lesson the Obama administration can learn from the Union’s experience is that a cap-and-trade system cannot be as volatile as Europe’s has been.

“You can see now one glaring issue we failed to address is to design a mechanism to adjust to external shock,” said Anthony Hobley, global head of the climate change practice at Norton Rose, an international law firm.

Against the sobering backdrop of a recession, a debate is beginning on the paths Europe has taken to reduce greenhouse gas emissions. Even Germany, which wrote blank checks to build Europe’s most aggressive renewable-energy program, is having second thoughts.

The country’s environment and energy ministers recently came to an agreement for reducing the ballooning costs of the renewable-energy program by close to €2 billion a year.

The trouble with subsidizing clean energy sources like wind and solar is that the cost rises as the programs become more successful. Renewables now account for almost one-quarter of German electricity generation, but they are also adding a similar amount to residential electric bills, according to energy consultants IHS.

In Britain, the government is conducting a very public debate with EDF, the utility controlled by the French government, over what price it will pay for electricity from a nuclear plant planned for Hinkley Point in southwest England. London had been counting on nuclear power to help it achieve its greenhouse gas reduction targets as well as meet rising power demands, but soaring cost estimates are putting that plan in doubt.

The government seems to hope that it will be let off the hook by a shale gas miracle like the one that has occurred in the United States. But Britain’s shale gas reserves are unproven, and the gas is controversial, after earth tremors set off by test drilling in 2011.

The adoption of a serious cap-and-trade program in the United States would be good news for Europe, Australia and any other government that wants to do something about climate change.

But without a global effort, the risk for Europe is that putting a high price on carbon and energy will just lead to a migration of industry and jobs to cheaper destinations.

Connie Hedegaard, the European commissioner for climate action, said in an interview that to blame environmental policies for job losses and economic malaise is “a false diagnosis.”

In fact, she said, the European renewables industry was one of the few areas where jobs had increased in the last few years.

The real challenges for European competitiveness, she said, were areas like wages and taxation levels. “It is important to get the diagnosis right in order to give the right medicine.”

Article source: http://www.nytimes.com/2013/02/21/business/energy-environment/21iht-green21.html?partner=rss&emc=rss