NEWS

E.U. carbon trading program holds lessons for U.S.

05/09/2008

Lisa Friedman, ClimateWire reporter

The European Union didn’t design a perfect emissions trading system—but somebody had to go first.

That was the message Thursday from the Pew Center on Global Climate Change, which laid out the lessons learned from the world’s first cap-and-trade program for carbon dioxide as U.S. lawmakers consider one of their own.

"We in the U.S. can thank the E.U. for doing this," said Eileen Claussen, president of the Pew Center.

With sweeping climate change legislation sponsored by Sens. Joseph Lieberman (I-Conn.) and John Warner (R-Va.) coming to the Senate floor next month, the main point of contention will be whether to create a cap-and-trade program that sets limits on the amount of allowable carbon emissions and establishes a system of carbon credits that companies can trade.

Detractors point to problems in the European Union’s system, such as a lack of good information about air emissions and early high volatility in the market price of emissions allowances. But the Pew report issued Thursday found that the European Trading System (ETS) was hardly a failure. Its greatest achievement: putting a price on CO2 that industries now factor into business decisions and creating a working mechanism for the long-term control of greenhouse gas emissions.

"This is a technical and a political success," said A. Denny Ellerman, an energy economist at the Massachusetts Institute of Technology and co-author of the report.

Ellerman said, "It’s not perfect, of course," but argued that many criticisms of the E.U. system are based on misunderstandings of its goals. The 27 member states of the European Union, he said, "have done more than any nation or set of nations to control greenhouse gas."

The report estimated that between 50 million and 100 million tons of CO2 were abated in the first two years of the system, equaling 2 to 5 percent of covered emissions. While Ellerman noted that the level isn’t high, he also argued that E.U. leaders were focused from the outset on establishing the market infrastructure rather than ambitious emissions goals.

‘Carbon has been absorbed as a business decision’

And while the decentralized nature of the E.U. system of caps and allocations among its 27 member states has been cumbersome, he noted that the U.S. system under a centralized federal regulatory structure wouldn’t have that problem.

The key lessons for the United States, he argued, are twofold: first, to have an emissions registry with strong data—something that has been incorporated into the Lieberman-Warner measure—and second, to set a cap on all industries comprehensively, rather than in a piecemeal system. The report pointed out that price volatility can be "dampened" by including allowance banking and borrowing—something the Lieberman-Warner bill also includes (Greenwire, May 9, 2007).

"Design matters," Ellerman said.

Malachy Hargadon, environmental counselor for the Delegation of the European Commission to the United States, agreed that the Lieberman-Warner bill appears to be heeding Europe’s early mistakes. And while his praise for the measure was muted—when asked his opinion of it, he described it as "the only game in town"—Hargadon also said the legislation could dovetail with the ETS to ultimately create a global trading system.

Hargadon agreed that the E.U. system had "teething problems."

But he noted that the member states are moving toward one European cap, and that caps will gradually extend to fluorocarbons and other chemicals.

Rachel Miller, director of federal affairs for BP America, called the ETS a "learning by doing exercise." She argued that long-term predictability is essential for investments.

"Going forward, you can see a carbon price has been absorbed as a business decision," she said.

Hargadon argued against a "safety valve" that would put limits on the cost of carbon purchases.

While lawmakers who support the price cap say it is needed to prevent carbon from getting too expensive, Hargadon urged the Senate to "keep it simple."

"Let the market work," he said.