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Advocates of carbon-trading schemes
in the United States like to point
to Europe's cap-and-trade program as a
model worthy of emulation. The Euro-
pean Union's Emission Trading System,
which has been in place since 2005, puts a
price on carbon dioxide pollution for the
purpose of inducing industry to cut emis-
sions of greenhouse gases and reduce the
e ects of climate change. European govern-
ments set annual caps on total
carbon dioxide emissions that
may be produced by a group
of energy-intensive industries.
They then hand out a number of
allowances to each company, allotting them
on the basis of past emissions. Each allow-
ance, called an EUA, permits the company
to release a ton of carbon dioxide into the
atmosphere. Companies whose emissions
exceed their allowances for a given year must
buy more; those with fewer emissions can
sell their allowances.
While other governments and authori-
ties (including a consortium of U.S. states)
are experimenting with carbon trading,
Europe's system accounts for more than
three-quarters of such trading on a global
scale. The trade in EUAs has amounted to
more than 140 billion euros ($196 billion).
Yet Europe has vanishingly little to show
for all this.
In theory, limiting the supply of the
pollution allowances helps to establish a
price for the emission of carbon dioxide.
That, in turn, is meant to provide industrial
manufacturers and power producers with
financial incentives to develop cleaner tech-
nologies. The reality has played out very dif-
ferently, however. A glut of pollution credits,
distributed without cost dur-
ing both the first, transitional
phase of the program and the
current working phase, drove
down the value of the EUAs.
As a result, Europe's carbon dioxide emis-
sions remain priced well below 20 euros
per ton. With the price of pollution so low,
economists say, industries that generate
and consume energy have no incentives
to change their habits; it is still cheaper to
use fossil fuels than to switch to technolo-
gies that pollute less.
"It is hard to tell if any investment decision
in the last three to four years has really been
shaped by the carbon price," says Sophie
Galharret, an energy economist with the
French-Belgian power utility GDF Suez and
a research fellow studying European energy
and climate markets at Sciences Po, France's
elite university of political science and eco-
nomics in Paris. "The perfect market should
provide such incentives," says Galharret,
"but today's real market does not."
Indeed, many doubt that Europe's trad-
ing scheme will drive innovation forward
anytime soon. The European Union has
vowed to cut greenhouse-gas emissions by
at least 20 percent---relative to 1990 levels---
by 2020. That translates into a 1.74 percent
annual reduction in allowances available to
companies covered by the trading system.
But companies can easily meet the emis-
sions goal without deploying new technolo-
gies. The trading rules allow the companies
to receive "o sets" to their own pollution if
they invest in projects that reduce or pre-
vent greenhouse-gas emissions in devel-
oping countries outside the EU. The other
half of the necessary reductions will be
achieved if EU members make good on
mandated increases in renewable energy.
In other words, though the carbon market is
described as the centerpiece of EU climate
and energy policy, energy investors may
ignore it for at least the next decade.
Such problems explain why, even as the
United States looks to Europe for a market-
based approach to controlling emissions,
critics there are clamoring to further tighten
the EU emission trading system, or to scrap
the carbon market altogether.
Blame a combination of factors---bad infor-
mation, the coddling of domestic industries,
the recent economic downturn---for blunt-
ing the European Union's emission trad-
Carbon Trading on the Cheap
CONGRESS IS DEBATING A CAP AND TRADE SYSTEM TO REDUCE
CARBON DIOXIDE EMISSIONS. BUT EUROPE'S VERSION OF THE
MARKET BASED SCHEME HAS BEEN A FAILURE SO FAR.
By PETER FAIRLEY
EUROPEAN UNION S
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