Argument: The EU Emissions Trading System is a success and model

Issue Report: Cap-and-trade versus carbon tax

Issue Report: Carbon emissions trading

Supporting articles and reports

“Review of Environmental Economics and Policy, Oxford University Press, Winter 2007

“Review of pilot phase of European Union Emissions Trading Scheme finds it to be successful”, Denny Ellerman, May 28th, 2007 – “An analysis of the historical emissions data by the economists suggests that abatement or environmental measure taken by companies had achieved a reduction of about 7 per cent, even allowing for the growth in emissions that accompanies growth in gross domestic product. The economists conclude ETS has been successful in helping to correct what they call the market failure that surrounds climate change, and in delivering the EU’s commitments to reduce carbon dioxide (CO2) emissions under the Kyoto Protocol. The seven conclude that it will be central to future global climate negotiations. They also call for a global framework for managing climate policy in the long term.”[1]

“It shows that emissions trading can be done, and will be hard to ignore in future climate negotiations.”

“The challenges of establishing a global system are likely to be formidable,” they warn.

Shayle Kann. “The Case for Carbon Trading”. Celsias. – 1) The EU ETS, Europe’s carbon trading system under the Kyoto Protocol, has been a failure and will continue as such The first part of that argument, that the EU ETS has not achieved its goals so far, is all but undeniable. Prices for carbon under the EU ETS dropped down to just a few cents and have never made a real recovery, few countries have reached their emissions targets to date, and the biggest polluters have reaped windfall profits from the free allocation of emissions allowances. For anyone who has been involved in Kyoto, however, this has not come as a surprise. And not because they knew the EU ETS would fail, but because the first phase of the EU ETS (2005-2007) was designed as a “pilot” phase, meant to work out the (significant) kinks in the system. Phase II of Kyoto just started last week, and offers substantial differences from the pilot phase. The World Business Council for Sustainable Development released an article the same day as our interview was published, outlining many of these differences. Two of these struck me as most relevant. First, the primary reason for the EU ETS failure in phase I was an over-allocation of permits by a number of countries. These countries acknowledged the mistake and attributed it to an admitted lack of complete information at the time regarding their own countries’ emissions. However, in Phase II new calculations are being used based on 2005 data, and the new assignation of permits should leave companies short around 250-260 million tons CO2 each year, requiring significant changes in environmental practice. Second, emissions targets in Phase I were voluntary. Phase II brings with it the introduction of mandatory emissions targets with international enforcement. Admittedly, this enforcement will likely extend only as far as public reprimand, but that has been an effective tool in other global environmental agreements. Janet Peace, a senior economist at the Pew Center on Global Climate Change , noted,

“Many people missed the fact that [Phase I] was the learning phase. But the first part wasn’t even Kyoto. That was their warm up. This was how they figured out and got the infrastructure in place.” — WBCSD

So I do think it is fair to assume that the EU ETS has been ineffective so far. And I agree that providing windfall profits for the biggest polluters is a terrible idea. But it is not fair to write off the next stage, which has the potential to induce real, lasting change. The Kyoto Protocol isn’t nearly perfect, but it should be commended as a valiant attempt at global coordination against climate change.

The EU ETS has successfully reduced carbon emissions: According to the 2007 Review of Environmental Economics and Policy, an analysis of the historical emissions data suggests that abatement or environmental measure taken by companies had achieved a reduction of about 7 per cent.

The EU ETS has successfully placed a price on C02: Review of Environmental Economics and Policy, Oxford University Press, Winter 2007 – “The EU has succeeded in placing a price on CO2 that starts to reflect the scarce capacity of the earth’s atmosphere to absorb more greenhouse gas emissions”.

The EU ETS Commission has effectively responded to its mistakes in initially over-allocating carbon credits: After the overallocation in the first round, the Commission reduced the proposed number of allowances of 14 of the 25 member states by a combined annual amount of almost 100 million tonnes of CO2, according to the Winter 2007, Review of Environmental Economics and Policy.[2]