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On global warming, what US can learn from Europe

By Staff writer of The Christian Science Monitor / January 30, 2007

Momentum is building in the United States to fight global warming. And the most popular proposal to do that, at the moment, is through a nationwide "cap and trade" system.

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At least three major Senate bills incorporate the idea. Large corporations, including big oil firms that until recently opposed such regulation, are backing the approach in theory. On Friday, the United Nations is slated to release a key report on the scientific consensus on global warming, which will put even more pressure on nations to act, analysts suggest.

But the real trick to effective legislation is in its details, a lesson that the European Union (EU) has learned the hard way as it prepares to cut greenhouse-gas emissions next year under the Kyoto treaty. So many companies emit so much carbon dioxide that the potential market for emissions trading is huge. Missteps could be costly, involving billions of dollars in unwitting subsidies or penalties for industries.

"Cap-and-trade markets for carbon gases are definitely on their way to the US," says Andrew Ertel, CEO of Evolution Markets, an energy and carbon-emissions trading firm in White Plains, N.Y. "The lesson from Europe is to keep it simple."

In theory, cap-and-trade systems hold much promise. They allow companies to find the most cost-effective way to reduce emissions. If one firm finds it cheap to cut its emissions below its federally mandated cap, then it can sell the difference – known as a carbon emissions allowance – to a firm that finds it much more expensive to cut emissions. As the government tightens the cap, credits get more expensive, which pushes companies to trim emissions.

Trading is harder in practice

In practice, cap and trade is more difficult.

Under Kyoto, the EU has already used cap and trade to trim 100 million tons of C02 emissions, according to some estimates. Europe's experience, however, has not run smoothly.

European nations still lag in meeting carbon reduction goals. They mistakenly set their base-line emissions far too high, according to an October analysis by Point Carbon, a global carbon-data firm. So when European companies began to trim their actual emissions, they found they had far more allowances than they needed. The result: The price of emissions credits nose-dived last April, falling by two-thirds in a month.

The EU plan also handed out many of its allowances free of charge, rather than having them auctioned off, says David Hawkins, director of the Natural Resource Defense Council's climate center. That reduced the price of the allowances and sparked charges of a government giveaway to industries.

Finally, the EU has not laid out a decades-long plan that clearly shows how the cap will tighten, the Point Carbon study says. Instead, its plan stops at 2012, when the Kyoto limits expire, creating uncertainty in the business community over what happens next.

"One key lesson from Europe's experience is that the US must structure markets so they're fair to consumers and only reward companies for cutting emissions, not just for being effective in lobbying for large [numbers] of pollution allowances," Mr. Hawkins says.

Here in the US, pressure to regulate greenhouse gases is building.

Last fall, California unveiled its plan to cut its emissions 25 percent by 2020. Most expect a California trading program, although it isn't absolutely mandated. In the Northeast, carbon-emissions trading is slated to begin in 2009 as part of a nine-state Regional Greenhouse Gas Initiative.