Every market, especially one as young as the European carbon emissions trading system that started last year, is prone to sharp swings. But the 25 European Union governments that have created this market have no interest in seeing the traded price of carbon suddenly halve, as it did in the period of only 48 hours this week. Such market plunges could undermine what ought to be the most efficient and flexible way for EU governments to implement their carbon reduction obligations under the Kyoto climate change treaty.

Moreover, the remedy lies in the hands of governments that, in concert with the European Commission, decide how many pollution permits to supply to the system that covers 11,500 energy-intensive industrial installations across the EU. Supply of these permits should be less than demand for them; otherwise there will be no reduction in carbon pollution.