U.S. watches as EU struggles with ‘cap-and-trade’

Move to bolster carbon permit prices

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Scrambling to save the continent’s effort to cap carbon emissions, European Union lawmakers approved this week a plan to bolster the price of carbon permits, which had fallen so low in recent weeks that some warned it could undermine the system.

The EU plan represents the globe’s most ambitious government-run “cap-and-trade” trade program to try to reduce carbon emissions as a strategy to limit climate change. Early in his first term, President Obama eyed such a system for U.S. companies, but the idea was dropped in the face of strong opposition from Republicans in Congress.


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The idea of the program is to set an overall ceiling on carbon emissions for the bloc as a whole and to let individual companies buy and sell government-issued permits for how much carbon their plants can produce. Theoretically, the market thus created would reward more efficient, cleaner producers and put pressure on dirtier companies to clean up, but U.S. critics have derided the idea as a “cap-and-tax” plan.

The European Parliament’s 344-311 vote on Wednesday will delay the sale of 900 million carbon permits to polluters in order to boost prices, which had fallen to an all-time low in April owing to what analysts said was a gross initial oversupply of permits.

The plan, an amended version of a proposal rejected in April, will return the back-loaded permits to the carbon market next year when, officials hope, the EU’s economy will have recovered and demand will be stronger. Prices for carbon permits jumped 7 percent Wednesday to about $6 per ton.

The legislation still must be approved by representatives of national governments and EU ministers.

Experts on both sides of the debate are closely watching the EU experience.

“In theory, it shouldn’t matter when they introduce these allowances. Delaying it shouldn’t have an effect on price,” said environmental analyst and economist Dallas Burtraw. “But investors seem to be taking this action as a signal of the European Union’s commitment to support the carbon market, and that has helped to drive up prices.”

Mr. Burtraw, a senior fellow at research nonprofit Resources for the Future, said in addition to the two recessions since 2008, European policies, such as those that pushed for renewable energy, also reduced demand for carbon emissions. As a result, prices for the cap-and-trade market dropped drastically, undermining the market incentives of the plan.

The Emissions Trading Scheme (ETS) was launched in 2005 to curb greenhouse gas emissions from approximately half of Europe’s key industries. It placed a hard cap on the total emissions allowed and distributed pollution permits to companies. The ability to trade permits as the cap was gradually lowered was supposed to provide the incentive for power plants and factories to cut down on pollution.

Flawed in concept?

Climate and energy policy specialist Lee Lane said the troubled debut of the ETS should be a cautionary tale for U.S. supporters of the concept, calling the EU plan “deeply flawed.”

“The fact that the Europeans are in the process of changing their own numerical targets suggests that [the cap-and-trade system] may not be a very realistic approach to the problem,” said Mr. Lane, a visiting fellow at the Hudson Institute.

Mr. Lane said that because there is no global agreement on greenhouse gas emissions restrictions, the ETS will not make a significant impact in cutting global emissions.

“Europe simply cannot affect global emissions that much, acting unilaterally as they are doing. And this is frankly the same lesson that President Obama ought to learn with his new proposals for restricting greenhouse gas emissions: [Europe] is having such a deep recession in part because they are overregulated in the first place.”

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