European Union Emissions Trading Scheme - Research Paper Example

 The policy, politics, and success of the European Union Emissions Trading Scheme The perceived risk of carbon in the atmosphere By the turn of the twentieth century there had been considerable speculation that greenhouse gases might cause global warming with real effects on climate, but because the mechanism was misunderstood (it was thought to depend on radiative transfer of heat into space when in fact convection is far more important) and because the amount of carbon dioxide in the atmosphere was thought to be constant, the sharp temperature rises before 1940 were attributed to natural causes, and with the overall cooling of 1946-79 the issue did not seem important (indeed, in the 1970s some popular periodicals ran articles about the threat of a new ice age). But in the 1950s, a correct, convective model of heat transfer in the atmosphere was developed, and in the 1960s and 70s, techniques in paleoclimatology made it possible to establish that the amount of CO2 in the atmosphere was in fact increasing rapidly. (Weart) Meanwhile, a serious global environmental movement had developed by the mid-1970s, and gained strength through most of the 1980s. At first it was unaffiliated with either the right or the left; the first major environmental proposals for international action came from the Nixon Administration, the Thatcher government sought major reductions in pollution, and the first major German efforts to take action about global warming, in the 1980s, were proposed by the Christian Democrats. Still, the environmental movement and the left drifted into a mutual embrace; by 1984, the Green parties and overall movement were a major, and sometimes dominant, force in the European radical left, though even very conservative parties had to pay at least token attention to environmental issues. (Guha 79-92) Thus when climate change warnings emerged from climate scientists in the United States in 1979 and 1983, and internationally in 1985, there was a large and receptive audience, already concerned about the environment, already understanding how to mobilize around it, and ready to demand action ("Fact Sheet"). The immediate involvement of a large number of environmental NGOs in publicizing the emerging issue, and the general agreement among climate scientists, caused widespread calls for more study, which led eventually to the historic landmark of the IPCC's 1988 and 1990 reports. These made global warming a central issue to the environmental cause at a time when Left parties in Europe and elsewhere were enjoying a resurgence, thus thrusting global warming onto the political central stage. By 1992 it was imperative for at least every party on the center-left or leftward in all the economically developed democratic nations to have a position that called for some kind of action on global warming, and in most European nations, the position was popular enough so that conservative parties had to take a general "me too" position as well. Only in the United States, with the rightward shift of the Republicans after the "Gingrich election" of 1994, did the "Left" association of the global warming cause become a defining feature. How atmospheric carbon moved onto the European agenda Ellerman points out that although the EU's ETS is seen as a uniquely European environmental program now, in fact its intellectual and policy roots are in the development of cap-and-trade protocols in the United States, during the 1970s and 1980s, for sulfur dioxide and nitrogen oxides ("Lessons" 2). The essence of all cap and trade schemes is to set a goal politically or technically, and then to allow private enterprise to meet the goal by coordination through the market. Specifically, an overall target level of the emission of the noxious substance is set (the cap), and individual coupons or certificates permitting its release in specified quantities are then issued by auction, allowance, or other methods. An enterprise needing to release the noxious substance must then have certificates for the amount they release, with legal penalty a consequence of exceeding the certificated amount. Certificates are freely traded, so that low polluters, who do not need all their certificates, are permitted to sell them on the open market to high polluters, who need more than their allowance. This creates a flow of money from high to low polluters, incentivizing the high to improve and giving the low a competitive advantage. Over time, it should force the high-polluting enterprises to reform or close, and the lower polluting enterprises to expand (and to improve so as to gain further advantages over the high polluters). Gradual reduction of the overall cap, through supply and demand, forces the polluter's penalty and the non-polluter's reward ever higher, ensuring continued favorable technical change. Cap and trade was so successful an approach to sulfur dioxide (the leading cause of acid rain) and to nitrogen oxides (the leading cause of smog) that in 2003, the U.S. Congress created another cap and trade program for atmospheric emissions of mercury, with extensive bipartisan support. (Snowe "Remarks" 4825) Cap and trade thus has extensive and deep roots in both American culture and free-market economics; how did it come to be the European approach to climate change (and a matter of such contention in the United States)? At the same time, following the election of Bill Clinton, that American conservatives were becoming more conservative and rejectionist, the global warming reports were producing a strong effect across the political spectrum in Europe, with conservative parties at least trying to buy off opposition. The clear political need in Europe by the mid-1990s was to do something, and perhaps because the acid rain problem, solved by cap and trade, had hit the very Green countries of northern Europe very hard, and been so clearly alleviated by the American cap and trade program, the analogous idea of using cap and trade to solve carbon emissions was an easy one to reach for. In the run-up to the Kyoto Conference, this tended to push the European leadership toward a generally Green position (Guha 104). As early as August 1995, in the preliminary meetings to set up the Kyoto Summit, European leaders, particularly the Germans and French, expressed a strong desire that what emerged from Kyoto should be a binding reduction in greenhouse gases, rather than a pledge to work toward vague goals, urging voluntary action, or a mere effort to hold down the rate of increase. The decision to put binding reductions on the table, and indeed make them the centerpiece, was an early European commitment, well in advance of other nations and regions. (Depledge 6) The experience with cap and trade in other pollutants and the obvious applicability to greenhouse gases (GHGs) meant that the delegates were likely to seriously pursue a binding global cap and trade agreement. At Kyoto itself, the debate was lengthy and sometimes acrimonious; Depledge says that every single article of the Protocol is the product of extensive negotiation and bargaining (79) and an appendix listing all of the amendments and proposals shows literally dozens of them (134-135). (I counted 79, and of course these just represent the ones that reached the point of being formally written up). At the Kyoto Climate Summit, the European Union committed to binding goals to reduce emissions of carbon into the atmosphere; the goals, embodied in the Kyoto Protocols, were to go into effect on February 16, 2005. The Kyoto Protocols specified three market mechanisms by which nations (and the EU, which functioned as a single economy for purposes of the negotiations) could pursue carbon reduction, of which carbon markets were the simplest to implement, mainly because they were the only market option to be entirely domestic. ("Kyoto") The EU had thus committed to reducing carbon emissions and had set up a framework within which cap and trade programs would be the easiest way to do it. As Ellerman summarizes the situation, The choice of a cap-and-trade system in Europe and the particular structure that it assumed are the result of four factors. First, it came to be recognized in the late 1990s that something more would be needed if the EU15 were to meet their common Kyoto obligations and that this additional measure would need to be adopted at the European level. Second, an EU-wide carbon tax was off the table since the proposal to enact one had failed in the 1990s in part because fiscal matters, unlike regulatory measures, require the unanimous agreement of all Member States. Third, the early experience with the U.S. SO2 trading system and the embrace of trading in the Kyoto Protocol made trading a logical approach. Fourth, the recognition of the lack of trading experience and the requisite trading infrastructure in Europe prompted the adoption of the trial period to provide these prerequisites. ("Prototype" 3) The Emissions Trading Scheme to date In 2005, the European Union inaugurated the Emissions Trading Scheme for a three-year trial period, as its method of pursuing its Kyoto Protocol targets. Most of the EU nations committed to an attempt, across seven years, to reduce carbon emissions to 92% of their 1990 levels; a few, mostly poorer nations in the south and east of the EU, but also including France, promised to hold carbon emissions at 1990 levels (the so-called 100% or "reduction of zero" approach) (Depledge 133). Each national cap in 2005 was supposed to be set to 100% of the 1990 level; the caps for the 92% nations would then be reduced about 1% per year, bringing about the 92% level in 2012, when the Kyoto Protocols would expire (Depledge 133). The caps actually only applied to electricity generation. In many nations, due to economic conditions, the caps were not actually reached anyway during 2007, leading to a near zero price for emissions (Ellerman "Lessons" ) That may have been good though inadvertent timing; perhaps exactly because the yoke was easy and the burden light, there was little opposition to continuing the three year trial program, which ended in March 2008, into a fulltime program for the rest of the duration of the Kyoto Protocol. (Ellerman "Lessons" 5) Implementation problems were minimal; Ellerman found relatively few overall macroeconomic costs, with a slight tilt in price that slightly increased imports of aluminum (and reduced domestic production) because aluminum is an electricity-intensive product ("Lessons" 26). Allocation was in general more contested than in the American sulfur dioxide and nitrogen oxide programs, but this may have been because all of the players – environmental bureaucrats and utility economists – had an extremely good understanding of the implications of each move (Ellerman "Lessons" 31). So far the ETS program appears to be neither economically nor administratively costly or complex. The mixed record of carbon emissions trading under the Emissions Trading Scheme At the least – and it is a very least – by seriously implementing the Kyoto Protocol in the form of the Emissions Trading Scheme, the European Union put considerable pressure on the "carbon outlaws" – the six nations that did not sign on to the Kyoto program and collectively represent about 40% of global carbon emissions – to at least give some lip service to the idea of carbon reduction by promoting alternate, voluntary methods of carbon reduction (Kremmer). Since that time the "carbon outlaws" have at least continued to participate in further climate conferences at Poznan, Bali, Copenhagen, and Cancun; if hypocrisy is the tax vice pays to virtue, the EU ETS has at least imposed that much of a "carbon tax" on the "carbon outlaws." In Europe, as Ellerman points out, to have put a multinational single-price plan into effect at all, and then to have renewed it and brought more nations under its umbrella, is a major political accomplishment ("Lessons" 6). Especially when this is contrasted with the failure of the Obama Administration to pass even a beginning cap and trade bill several years later, this serves as a model for further future action on greenhouse gases. The critical importance of winning conservative-partisan support, or at least acquiescence, can hardly be overstated in the contrast of results. It may also be important, in comparing with the United States, to consider that in many of the European nations, electrical power generation is a government monopoly, and so opposition from those most directly affected was muted, and to some extent they were unable to mobilize opposition by ostentatiously passing the costs on to the consumer, as American manufacturers, energy companies, and utilities sometimes threaten to do. As for the heart of the issue, actual reductions in greenhouse gases, Ellerman and Buchner estimated that during its first two years of implementation, the EU ETS was able to prevent a 1-2% increase in carbon emissions by the EU, and perhaps to achieve a statistically insignificant decline (11). This is all the more remarkable in that 2005 and 2006 were years of rapid economic growth, and that a substantial part of the decline occurred during those two years, not during the recession year of 2007. (Ellerman "Lessons" 14) The total effect is even more remarkable because the EU ETS actually only covers electrical generation, so that "As it now exists, the EU ETS includes about 45% of the CO2 emissions and a little less than 40% of the GHG emissions of the EU." (Ellerman "Prototype" 3) This would tend to argue that if a relatively small effort in an economic area covering less than half the problem can at least bring the increase in GHGs to a halt, a more serious and comprehensive global effort should be able to produce significant results in a reasonable time frame. Intellectually, the experience of cap-and-trade in Europe has forced the development of additional economic theory about the "tragedy of commons" problem that is inherent in setting the global cap as a sum of national caps. (Cramton and Stoft 3) Whether the ETS persists beyond the expiration of the Kyoto Protocol or not, the experiment has at the least stimulated a great deal of creativity and awareness that may result in more effective and workable market methods for carbon reduction in the future. Works Cited "Fact Sheet Global Warming." Environmental Defense. Environmental Defense: January 2003. Web. December 7, 2010. "Kyoto Protocol." UNFCCC.int. UNFCCC. n.d. Web. December 7, 2010. Cramton, Peter, and Stephen Stoft. "Kyoto's Climate Game and How to Fix It." Global Energy Policy Center Issue Brief 10-08 (September 18, 2010). Print. Depledge, Joanna. Tracing The Origins Of The Kyoto Protocol: An Article-By-Article Textual History. UNFCCC: New York 2000. Print. Ellerman, A. Denny, and Barbara K. Buchner. "The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results." Review of Environmental Economic Policy 1.1 (2007): 66-87. Print. Ellerman, A. Denny. "Lessons For The United States From The European Union’s CO2 Emissions Trading Scheme" in Ellerman, A. Denny, et al. Cap-And-Trade: Contributions To The Design Of A U.S. Greenhouse Gas Program. MIT Center for Environmental Policy Research: Boston 2008. 2-35. Print. Ellerman, A. Denny. "The EU’s Emissions Trading Scheme: A Prototype Global System?" MIT Joint Program on the Science and Policy of Global Change Report No. 170. MIT Press: Cambridge February 2009. Print. Guha, Ramachandra. Environmentalism: A Global History. Longman: London 1999. Print. Kremmer, Janaki. "Climate summit challenges Kyoto's approach." csmonitor.com. Christian Science Monitor. January 10, 2006. Web. December 7, 2010. Snowe, U.S. Senator Olympia. "Remarks." Congressional Record. February 27, 2003. 4825. Print. Weart, Spencer. "The Carbon Dioxide Greenhouse Effect." The Discovery of Global Warming. American Institute of Physics: December 2009. Web. December 7, 2010. Read More