CUT EMISSIONS AND GROW?

New provisions for Phase 3 of the European Union (EU)’s climate change-reversing emissions reduction program, announced last week by the European Comission (EC), demonstrate seriousness of the first order. The rules will cost. (See THE EU PRESENTS: THE FUTURE OF EMISSIONS REDUCTIONS)

EC President Jose Manuel Barroso estimates they will cost each of the EU’s 500 million citizens 3 euros a week, 75 billion euros a year. That is 0.6% of the EU GDP. But Barroso says not acting would cost much more: "[It would be at least 10 times that and could even approach 20 percent of GDP…[By acting] Europe can be the first economy for the low-carbon age…There is a cost, but it is manageable…And every day the price of oil and gas goes up, the real cost of the package falls."

Recognizing this, the EU is serious about “emissions rendition” and is considering a tariff or some other form of charge for goods imported into member nations from countries that can produce them cheaply because they do not have emissions reduction programs. The EU is hesitating on this issue because while the tariff would create the chance for EU manufacturers to compete inside their own borders, it could put EU exporters at a serious disadvantage in international markets. It could draw other nations into emissions-reduction programs - or demonstrate such programs are economically disadvantageous.

The EU program has racked up some significant accomplishments. (click to enlarge)

Higher costs for emissions may reach 50 billion euros by 2020. But as a European scholar said, "It is clear that in some shape or form emissions must have a financial value…"

Perhaps the most watched aspect of the new rules in the U.S. will be the increased portions of auctioned (rather than freely distributed) emissions permits for the EU Emissions Trading System (ETS), its cap-and-trade marketplace. Early on, the ETS gave away too many permits. The price of permits fell and emissions were not reduced. The new measure seeks to correct this.

The world has gained a tremendous amount of information about what does and does not work in a cap-and-trade system at EU players’ expense. The U.S. Senate will begin debating its own cap-and-trade system in the spring and one of the most contentious points, it is already clear, will be what part of emissions allowances should be given and what part should be auctioned.

Can Europe cut carbon without cutting growth?
Mark Rice-Oxley, January 24, 2008 (Christian Science Monitor via Yahoo News)

WHO
EU member nations, the EU ETS, observers and predictors

WHAT
The EU “triple 20” contained in the newly announced EC “road map” for Phase 3 of the EU’s climate change-fighting emissions reduction program calls for an increase in New Energy capacity of 20%, an increase in Energy Efficiency of 20% and a reduction in greenhouse gas emissions of 20% by 2020.

Whether emissions credits are auctioned or freely allocated impacts their market price and, ultimately, the success of a cap-and-trade system. (click to enlarge)

WHEN
The U.S. – which is expected to debate a cap-and-trade system in 2008 but probably not institute it until 2009 – will no doubt continue studying and learning from the EU system.

WHERE
By demonstrating the ability to reach these goals without losing economic competitiveness, jobs and growth, the EU hopes to draw the world’s most serious threats to climate change – China, India and the U.S. – into a similar pact. EU leaders say with those nations on board a “triple 30” is within reach by 2020.

Emissions trading was highly volatile early on but has smoothed out with time and experience. Recent calculations suggest the fledgling market has cut EU emissions 1% to 2% already. (click to enlarge)

WHY
- Electricity rates may rise in the EU by 15%.
- Travelers could pay a 40 euro premium for long-haul flights.
- Drivers will pay more for EU gasoline which must be at least 10% biofuel by 2020.
- EU member nations have been assigned emissions caps and New Energy goals according to their relative capacities and economic development. (ex: Britain must up its New Energy from 2% to 15%; France must go from 10% to 23%; Sweden must go from 40% to nearly 50%. Britain and Denmark must cut emissions while Bulgaria and Romania can increase them) See EU TO UK: BUILD OFFSHORE WIND, UP RENEWABLES
- The big change in the ETS is to up the share of emissions permits that must be auctioned. Giving away too many permits makes the cost of them too low and thus fails to incentivize emissions cuts or the purchase of offsetting CERs via the UN CDM. (ex: Utilities must purchase all permits by 2013; airlines must for the 1st time purchase permits.)

U.S. voters take note: This is called "leadership." It is rare. (click to enlarge)

QUOTES
- Stephan Singer, environmentalist, WWF: "It's insufficient…Europe was in favor at Bali of the declaration that in the future developed countries should cut by 25-40 percent…Now the ink of Bali is not even dry and they come out with a proposal for 20 percent."
- Antony Froggatt, senior research fellow, UK think tank Chatham House: "The key thing is for targets to be delivered on…Unless we reverse this trend, the rest of the world will say 'good policy but you're not delivering on it.' "
- Tom Burke, founding director, sustainability developer E3G: "It's a pretty important, concrete package with some pretty tough demands…The clear message from this is the seriousness of the EU's intent to do something about climate change…The reason Europe is doing this is that there is a really deep understanding of how important it is to the security and prosperity of ... Europeans…[Others have different economic circumstances] but they all face the same problem of climate change."