The Volokh Conspiracy - Would Cap-And-Trade Work Here or Would it Fail as in Europe?

Sean Higgins warns us of the failure of Europe's cap-and-trade regime:

The major cap-and-trade bill now working its way through Congress is not without precedent. The European Union has had a cap-and- trade regime in place for years. It just hasn't worked so far.

Begun in 2005, the EU's Emissions Trading Scheme has raised energy prices with "uncertain" effects on greenhouse gas emissions, according to numerous studies.

Even green groups have been critical. The Natural Resources Defense Council, for example, has called ETS "an example of what not to do."

This failure has not daunted fans of Congress' cap-and-trade bill. They claim to have learned from the earlier mistakes.

"Those lessons have resulted in a pretty significant change in the way the U.S. system is being designed," said Sierra Club lobbyist John Coequyt, who calls Europe's program "ineffectual."

Carbon Copy?

Critics like Myron Ebell, a climate policy analyst for the free-market Competitive Enterprise Institute, see no reason to be that optimistic. He notes that the main problem with ETS was the giving away of the program's carbon allowances.

"Congressman Jay Inslee (D-Wash.) said we're not going to make the same mistake here," Ebell noted. "But as soon as it became apparent they didn't have the votes without big-business support, they started giving away all of the credits."

Indeed, the current bill began as a 100% auction of permits to emit greenhouse gases. It now would give away 85% of the permits to businesses, utilities and the like. . . .

Under the programs, carbon permits are either given away or auctioned off, with the government making fewer available each year.

A business with more permits than it needs can sell them to others, creating a market in carbon. As the permits become scarcer, firms therefore have financial incentives to reduce their emissions.

Euro Trash

That is how it works in theory. But it hasn't worked out that way in Europe, according to a study last year by the Government Accounting Office. The GAO is the nonpartisan fact-finding arm of Congress.

"The (ETS) program's effects on emissions are uncertain and its impact on sustainable development has been limited," the GAO said.

Individual EU nations tried to protect their local industries and ended up issuing more permits than there was total carbon output. In short, the permits never became scarce.

"In 2006, a release of emissions data revealed that the supply of allowances -- the cap -- exceeded the demand, and the allowance price collapsed," the GAO found. The EU told the GAO that it could not be certain ETS resulted in any reduction of emissions.

The price of permits fell from about 30 euros per ton of carbon dioxide in April 2006 to 0.1 euro in September 2007.

The collapse in carbon permit prices gave the EU industries little reason to innovate. The GAO found that there had been "no serious degree of private sector investment in cleaner technologies." . . .

Emissions did fall 3% in 2008, but experts on both sides agree that that was largely due to the recession, which has reduced industrial output and energy usage.

Meanwhile, energy prices for end users have risen sharply. From 2004 to 2007, household energy costs rose by 16% on average in the 25 EU countries and industrial rates rose by 32%, according to the European Commission.

	[Jim Lindgren, June 8, 2009 at 11:31pm] Trackbacks Would Cap-And-Trade Work Here or Would it Fail as in Europe? Sean Higgins warns us of the failure of Europe's cap-and-trade regime: The major cap-and-trade bill now working its way through Congress is not without precedent. The European Union has had a cap-and- trade regime in place for years. It just hasn't worked so far. Begun in 2005, the EU's Emissions Trading Scheme has raised energy prices with "uncertain" effects on greenhouse gas emissions, according to numerous studies. Even green groups have been critical. The Natural Resources Defense Council, for example, has called ETS "an example of what not to do." This failure has not daunted fans of Congress' cap-and-trade bill. They claim to have learned from the earlier mistakes. "Those lessons have resulted in a pretty significant change in the way the U.S. system is being designed," said Sierra Club lobbyist John Coequyt, who calls Europe's program "ineffectual." Carbon Copy? Critics like Myron Ebell, a climate policy analyst for the free-market Competitive Enterprise Institute, see no reason to be that optimistic. He notes that the main problem with ETS was the giving away of the program's carbon allowances. "Congressman Jay Inslee (D-Wash.) said we're not going to make the same mistake here," Ebell noted. "But as soon as it became apparent they didn't have the votes without big-business support, they started giving away all of the credits." Indeed, the current bill began as a 100% auction of permits to emit greenhouse gases. It now would give away 85% of the permits to businesses, utilities and the like. . . . Under the programs, carbon permits are either given away or auctioned off, with the government making fewer available each year. A business with more permits than it needs can sell them to others, creating a market in carbon. As the permits become scarcer, firms therefore have financial incentives to reduce their emissions. Euro Trash That is how it works in theory. But it hasn't worked out that way in Europe, according to a study last year by the Government Accounting Office. The GAO is the nonpartisan fact-finding arm of Congress. "The (ETS) program's effects on emissions are uncertain and its impact on sustainable development has been limited," the GAO said. Individual EU nations tried to protect their local industries and ended up issuing more permits than there was total carbon output. In short, the permits never became scarce. "In 2006, a release of emissions data revealed that the supply of allowances -- the cap -- exceeded the demand, and the allowance price collapsed," the GAO found. The EU told the GAO that it could not be certain ETS resulted in any reduction of emissions. The price of permits fell from about 30 euros per ton of carbon dioxide in April 2006 to 0.1 euro in September 2007. The collapse in carbon permit prices gave the EU industries little reason to innovate. The GAO found that there had been "no serious degree of private sector investment in cleaner technologies." . . . Emissions did fall 3% in 2008, but experts on both sides agree that that was largely due to the recession, which has reduced industrial output and energy usage. Meanwhile, energy prices for end users have risen sharply. From 2004 to 2007, household energy costs rose by 16% on average in the 25 EU countries and industrial rates rose by 32%, according to the European Commission.