U.S. CAN LEARN FROM EU EMISSIONS TRADING AND PAY IT FORWARD

A cap-and-trade system is widely regarded as the most politically accessible way for the U.S. to put a price on emissions, bring market factors to bear on emissions reductions and begin helping in the fight to mitigate global climate change. The European Union (EU) Emissions Tradng Scheme (ETS) and the United Nations (UN) Clean Development Mechanism (CDM) have made mistakes getting their unprecedentedly ambitious efforts started. As a result, emissions reductions have not been impressive.

Jacqueline McGlade, executive director, European Environment Agency: "Of course it was ambitious to set up a market for something you can't see and to expect to see immediate changes in behavior…"

NewEnergyNews has been making this point for a long time: When the U.S. implements its cap-and-trade system, it should pay the EU a copyright fee. The EU and the world have learned much from the mistakes. The EU ETS grows more financially stable each year. Nobody who was realistic expected dramatic emissions reductions right away. Real reductions are not likely to occur until Phase 3 begins in 2013.

It is actually impossible to accurately estimate the EU program’s real effectiveness. How much would emissions have grown without the ETS? Where would the U.S. be on emissions caps without the EU’s leadership?

That said, a quick reconnoitering must follow.

Mistake number one: Allowing too many free emissions permits. That has been corrected. A progressive proportion of emissions allowances is being auctioned.

Mistake number two: Allowing special interests to exert influence. Corrected, especially in plans for 2013's Phase 3. Heinz Zourek, director general for enterprise and industry, European Commission: "As long as you treat [special interests] badly…it's better to treat them equally badly."

Mistake number three: Allowing utilities and power companies too many permits made it easy for them to profit from the first phase of the ETS, creating a backlash against the system. The fight with those big, powerful interests is ongoing.

Mistake number four: Offset projects in third world countries via the UN CDM may be preventing investment in New Energy. The UN CDM is making corrections but it is slowing progress.

The mistakes the EU has corrected and the ones it is struggling with as it prepares the 2013 plan are invaluable to the U.S. as it prepares its own program. The U.S. pioneered emissions trading in the early 1990s with a small system that effectively dealt with acid rain. The EU, though, has made the real progress on such markets since the Bush administration shut down consideration of U.S. participation in early 2001.

David Victor, director, Program on Energy and Sustainable Development/Stanford University: "The politics you're now seeing in Europe are the real politics of carbon…The central lesson from Europe is that governments must find ways of managing the allowances that clearly are going to be one of the most valuable pieces of public property in the 21st century."

Both Senator McCain and Senator Obama favor a cap-and-trade system. They differ on the severity of emissions reductions necessary. Obama would begin with auctioned permits while McCain would eventually auction them.

Some of the EU’s most difficult challenges came because the U.S. refused to participate. Those difficulties will likely to be easier to manage once the U.S. comes in, especially because U.S. participation is expected to initiate an agreement with emerging economies (India, China, Indonesia, Brazil, etc.).

The most important question remaining: Once the systems are up and running, can the regulators tighten the caps enough to significantly cut emissions and effectively mitigate global climate change?

A market has been built from scratch. Eventually, it will act on emissions. (click to enlarge)

Europe’s carbon market holds lessons for the U.S.
James Kanter, June 19, 2008 (International Herald Tribune)

WHO
Cap-and-trade advocates, including Senators Barack Obama and John McCain; EU ETS participants; European Environment Agency

WHAT
The European Environment Agency reported carbon emissions from industries participating in the EU ETS cap-and-trade system continue to rise.

Improvements in regulation learned from tough lessons now make the market stable for investors...(click to enlarge)

WHEN
- 2005: Trading began in the EU ETS
- 2005 to 2006: EU emissions rose 0.4%
- 2006 to 2007: EU emissions rose 0.7%
- The Obama goal for cap-and-trade is to cut emissions 80% below 1990 levels by 2050.
- The McCain goal is to cut emissions 60% 1990 levels by 2050.


WHERE
- Emissions from 12,000 factories and plants producing electricity, glass, steel, cement, and pulp and paper and trading emissions permits in the EU ETS are quantified.
- British iron and steel sector emissions rose 10+%.
- British cement industry emissions rose 50+%.
- Smaller, emerging economies like Hungary want easier restrictions on growth while environmentalists want harsher restrictions.

WHY
- The EU’s first mistake was in allocating too many emissions permits in the first year of trading, allowing the permit value to plummet. That mistake has been corrected.
- Undue influence from individual industries has been curbed.
- Ferocious lobbying over the details for Phase 3 of the EU ETS is ongoing.
- Effective market oversight is crucial.
- The EU steel and aluminum sectors use a lot of energy, generated big emissions in the first 2 phases of the ETS and are fighting for big allocations in phase 3.
- Some multinationals are threatening to punish the EU by pulling investments out.
- EU airlines say they can’t compete against airlines in countries without cap-and-trade.
- Problems with the UN CDM may diminish investment in New Energy.

...In the beginning, it was a nightmare. The U.S. does not to need to make the same mistakes. (click to enlarge)

QUOTES
- Hugo Robinson , research group Open Europe: "We currently are in danger of losing yet another decade in the fight against global warming…The sheer amount of lobbying creates so much uncertainty about the way these markets operate that nobody really is investing in cleaner technologies in Europe…"
- Jacqueline McGlade, executive director, European Environment Agency: "It's easy, with hindsight, to say we could have been tougher…"
- David Victor, director, Program on Energy and Sustainable Development/Stanford University: "Government largess on a vast scale was actually one of the main reasons that the European system actually got off the ground…The challenge for the United States now will be to have enough pork to get people to the meal, but not to give away so much that we end up squandering public resources."