EU Carbon Trade Offers Cautionary Tale to U.S.
Jun 20 - International Herald Tribune
As the United States moves toward action on global warming, practical
experience with carbon markets in the European Union raises a critical
question: Will such systems ever work?
Backers of carbon markets, including the presumptive U.S. presidential
candidates Barack Obama and John McCain, see them as one of the cheapest and
most effective ways to control greenhouse gases in advanced economies.
Yet the experience in Europe, which established the world's largest
greenhouse gas market three years ago, tells a cautionary tale - one in
which politicians and influential industries may be diverting carbon trading
from its original purpose of reducing planet-warming gases.
"We currently are in danger of losing yet another decade in the fight
against global warming," said Hugo Robinson of Open Europe, a research group
in London.
On Wednesday, the European Environment Agency reported that carbon emissions
from industries participating in the carbon trading plan, known as cap and
trade, continue to rise.
Emissions from factories and plants that trade pollution permits rose by 0.4
percent between 2005 and 2006 and by 0.7 percent between 2006 and 2007,
during the first two years of the system's operations.
Europeans took an early lead in efforts to curb global warming, championing
the Kyoto agreement and implementing a market-based system in 2005 to cap
emissions from about 12,000 factories producing electricity, glass, steel,
cement, and pulp and paper. Companies buy or sell permits based on whether
they overshoot or come in beneath their pollution targets.
Although the system also underpins Europe's claim to be leading global
environmental policy, EU officials acknowledge that establishing such a vast
market has been more complicated than they anticipated, and that its
effectiveness so far has been limited.
"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," said Jacqueline McGlade,
the executive director of the European Environment Agency. "It's easy, with
hindsight, to say we could have been tougher," she said.
A major stumbling block arose at the outset, when some EU governments
participating in the effort allocated too many trading permits to polluters
when the market was created. That led to a near- meltdown of the market
after the value of the permits fell by half, and called into question the
validity of the entire system.
Since then, EU officials have promised tough reforms to fight against
special interests, and the price of carbon permits has largely recovered.
Yet a ferocious lobbying battle is under way as EU regulators seek to
overhaul the dysfunctional parts of the market by charging polluting
companies more and reducing the oversupply of pollution permits traded
within the system.
Brussels is also seeking to consolidate its oversight of the market, rather
than leave it partly in the hands of EU governments that, in some cases,
enabled companies to profit from the system by allocating them more
pollution permits than they needed.
"The politics you're now seeing in Europe are the real politics of carbon,"
said David Victor, the director of the Program on Energy and Sustainable
Development at Stanford University. "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."
Energy-intensive industries like power, steel and aluminum have geared up
their lobbying machines to challenge proposals that would force them to buy
many more permits than in the past. During the three years in which they
participated in the first phase of the new market, carbon emissions from the
iron and steel sector in Britain alone rose more than 10 percent, while
emissions in the cement industry rose more than 50 percent, according to
documents from the British Parliament.
The electricity industry in particular is rejecting proposals that would
force it to buy all of its allowances. That could prevent utilities like
E.ON and RWE in Germany and Vattenfall, a Swedish energy company, from
continuing to earn extra money from the system.
Meanwhile, major multinationals like the Anglo-Dutch oil company Royal Dutch
Shell and the steel giant ArcelorMittal have threatened to freeze some
investments in Europe unless the plan is reviewed. Airlines, including the
German carrier Lufthansa, say the regulations are unworkable without a
global deal on greenhouse gas regulations.
And poorer countries in the EU, led by Hungary, are clamoring to overturn
emissions allowances that they say are too stingy and risk undermining their
economic growth.
The proposals also are under attack from environmentalists, who want to
restrict polluters from using large numbers of permits from an offsetting
program, the Clean Development Mechanism.
They are concerned that offsets might undermine tight caps and delay efforts
to shift Europe to a low-carbon economy because European industries would be
too heavily reliant on other parts of the world to make reductions.
"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," said Robinson of Open Europe.
Carbon markets have come into vogue because they are more politically
palatable than imposing new carbon taxes.
Americans pioneered pollution markets in the 1970s and used them on a
broader scale with some success during the 1990s to control emissions from
power plants that produced acid rain. U.S. officials also pushed hard for
emissions trading to be included in the Kyoto climate protocol on the
grounds that markets are the most effective way of encouraging innovative
emission-reducing technologies.
But the momentum in the United States to create a nationwide carbon market
ground to a halt in 2001, when President George W. Bush withdrew support for
the Kyoto protocol. Bush said carbon controls would put an undue burden on
the U.S. economy unless fast- growing countries like China and India also
made commitments to cut emissions.
Now the tide is turning again in favor of carbon markets in the United
States. Although the Senate earlier this month blocked a bill that would
have imposed a cap-and-trade system to slash greenhouse gases by 2050, both
Obama and McCain have pledged support for market- based systems like the one
in Europe.
Obama, the presumptive Democratic nominee, has said he supports the use of a
market to reduce carbon emissions to 80 percent below 1990 levels by 2050.
His proposal would require pollution credits to be auctioned rather than
given away to big industries, including coal and oil companies.
McCain, a Republican, favors giving permits away to big polluters before
moving to an "eventual" auctioning of permits to reduce emission levels to
60 percent below 1990 levels by 2050.
Victor, the Stanford director, said Americans were likely to undergo many of
the same challenges already experienced in Europe.
"Government largess on a vast scale was actually one of the main reasons
that the European system actually got off the ground," Victor said. "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."
A question that hangs over the European system - and that is likely to be of
major concern to U.S. policy makers - is whether the rules still can be
tightened up sufficiently so that industries eventually emit less and adopt
cleaner technologies.
For Heinz Zourek, director general for enterprise and industry at the
European Commission, polluters of all sizes, not just energy- intensive
industries, should be seen to be participating in efforts to lower carbon,
and to reduce pleading by special interests.
"As long as you treat them badly," said Zourek, referring to different
sectors of the economy, "it's better to treat them equally badly."
Originally published by The New York Times Media Group.
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