The world's only economy-wide carbon trading system to cut dangerous, climate-changing emissions is circling the drain. A combination of factors – including some actually good news – has knocked the European Emissions Trading Scheme (ETS) seriously out of whack, and now it's in danger of falling apart.

If that happens, it won't just be the European Union's pride that suffers; it will mean the loss of a high-profile market-based tool for curbing greenhouse gases – just as efforts to get a grip on climate change are faltering worldwide.

Not just hot air

The EU's carbon trading scheme gives out – or sells – permits to pollute. That sounds like a weird way to cut pollution: but by requiring permits you can limit the amount of pollution and, through scaling back the number of permits issued, decrease it over time. As the “cap” on the pollution allowed gets lower, companies that can find less polluting ways to do business – say, with more efficient equipment or by using cleaner fuels – can sell their excess permits to companies that have a harder time cleaning up their act. This buys time for those businesses to eventually reduce their emissions, too. So far, so good…

But the economic downturn of the past few years has meant fewer widgets manufactured, fewer megawatts generated, fewer goods transported to market; in short, less carbon pollution. There's also been a lot more green power produced from solar and wind than expected, which has meant even fewer carbon emissions. Factor in a mild winter in Europe, and you've got a 2.4% drop in carbon emissions from 2010.

… And that's a bad thing, why?

Isn't less carbon pollution the whole point of the exercise? It is. But with carbon emissions dropping faster than expected, companies have all these extra carbon permits they haven't used – about 355m of them, in fact.

Sandbag, a UK-based climate action group, explains the problem: “As these surpluses continue to accrue, most analysts now agree that the European carbon market will be oversupplied out to at least 2020, depressing the carbon price, and reducing the market incentives for low-carbon investment for nearly a decade.”

There's the rub: a low carbon price means it's cheaper to pollute than to invest in renewables, and we lock in carbon-intensive practices for decades to come.

Buy your own

EU officials – and even some industry players – are scrambling to fix the system to bleed the excess permits out and restore a balance between targets and real-world emissions. The European parliament is considering measures to remove permits from the market. Environmental NGOs are calling for a lowering of the emissions cap.

But the idea of taking something of value away from businesses raises industry hackles; it's possible that political tinkering with the market will undermine confidence in the mechanism as a whole. That's led some experts – including Esso Petroleum – to call for a carbon tax to replace the cap and trade scheme.

Take Action: Visit Sandbag's website to buy your own carbon permits and take them out of action, and send a message to EU officials demanding that they tighten the system up before it's too late.