10 Lessons the US Can Learn From Europe's Cap and Trade


Photo via the Guardian

I posted earlier on a recent report that revealed Europe's oft-derided, occasionally-mocked cap and trade system has proved to be a success--though it had its share of serious problems along the way. Which was great news: Europe's emissions are falling by 50-100 million metric tons a year, or 2.5-5% annually, and the carbon market is now worth over $56 billion USD. Which is great for Europe--but it's also important news for Americans. Because it was such a bumpy road for Europe's Emissions Trading System (ETS) to become effective, US policymakers should be to craft a stronger cap and trade stateside based on its successes and shortcomings. Here are 10 ideas on how they can do so.The report, in addition to analyzing the successes of Europe's ETS, extrapolated the results to make some pertinent, pointed suggestions for US lawmakers as they continue to develop a cap and trade program in the Senate. Here are the report's ten conclusions and recommendations, via Climate Progress:

  • 1. Emissions trading works

    Recommendation: Develop an emissions trading system that learns from and improves upon the EU experience.


  • 2. Everyone will learn

    Recommendation: Build in a capacity to strengthen the system if and as experience supports this.


  • 3. Prices can be volatile and impacted by numerous unforeseen factors, which to date have reduced prices below expectations

    Recommendation: Consider carefully the lessons from the EU experience on price volatility, around unavoidable uncertainties in emission projections, the contribution of other policies, and systematic tendencies to underestimate the abatement and innovation responses.


  • 4. GDP impacts are small

    Recommendation: Don’t let concerns about macroeconomic impacts dictate the environmental targets, Economic impacts have been consistently less than projected.


  • 5. Industry can profit

    Recommendation: Resist inevitable pressures from industry to maximize free allocation, but engage companies more constructively in designing and understanding the full implications of the system.


  • 6. International competitiveness impacts are limited to a small number of industry sectors

    Recommendation: Concerns about competitiveness impacts should focus on a few potentially exposed industries. For these, tailored solutions should be pursued.


  • 7. Free allocation degrades efficiency and introduces risks either of windfall profits…

    Recommendation: Design to minimize net impacts on the aggregate profitability of incumbent sectors, whilst boosting the profitability of cleaner technologies and innovators. Consider possible parallels between electricity production and upstream allocation to refineries.


  • 8. … or additional inefficiencies

    Recommendation: A balance of free allocation between absolute and output-based should strive to minimize economic distortions as well as windfall profits. The balance between these two negatives should reflect each sector’s ability to pass through prices, its exposure to international leakage, and its potential for emissions abatement through radical innovation or demand reduction.


  • 9. There is a compelling economic rationale to maximize auctioning

    Recommendation: Maximize auctioning.


  • 10. Unilateral border adjustments may be a politically appealing way to respond to domestic pressures from special economic interests, but they risk serious problems in the international trade system

    Recommendation: Negotiate multilateral arrangements to contain or structure the use of border adjustments, focused upon minimizing emissions leakage, as and when specific problems can be demonstrated.

Good, sound suggestions here--especially regarding the findings on the GDP (the chief criticisms levied against the US climate bill all concern allegations that the economy will be stifled) and the case for minimizing free allocations (in Waxman-Markey, nearly all the carbon permits are given away free initially, though the amount that must be bought rises steadily). So whenever the Senate finally gets around to working on the climate bill again (it's scheduled for late September, but many suspect there will be further delays) perhaps they'll come armed with some ammo on the success of the first major cap and trade from across the pond.

More on Cap and Trade:
The Father of Cap-and-Trade Calls For... A Tax on Emissions
Sarah Palin Slams Cap and Trade in Op-Ed, Completely Misses the Point

Tags: Carbon Emissions | Congress | Economics | Global Warming Solutions

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