The European Union Carbon Emissions Trading System: The Seed of a Global Emissions Regime?
The European Union Emissions Trading System in carbon dioxide – an experiment carried out reluctantly and in desperation – has proven to be effective in reducing man-made carbon dioxide emissions incriminated as responsible for global warming. It has been so effective that it now points to the possibility of its extension to the whole world.
One of the policy implements we are currently testing for its efficacy, or lack of it, in containing global warming and reversing it is an emissions trading system (ETS) for carbon dioxide. In such a system, the total amount of permissible carbon dioxide emissions is specified at the outset. This amount is then divided into allowances (i.e. emissions permits) that are then distributed among industrial installations. (In principle, this distribution can extend to all entities whose market activity, directly or indirectly, produces carbon dioxide emissions.) If an industrial installation exceeds its allowances (i.e. its operations are not as efficient as they could be), then it must purchase additional permits from other more efficient installations. In this way, the ETS provides incentive to become more efficient.
The ETS is a bi-level control system. It combines top-down control in the total amount of permitted emissions and bottom-up control through the market behavior of those who or which trade in the distributed permits. The top-down control affords macrostability by ensuring that the collective conditions or objectives sought for by society are imposed at the outset to shape and select for the appropriate behavior among individuals. The bottom-up control affords microvariability as individuals, according to their particular circumstances, act accordingly within the constraint of the top-down control.
Of note in the top-down control exerted in the ETS is that it is social in nature: The total amount of permits generated is not determined by the market but rather by social concerns (instructed by the relevant science) about the adverse consequences of carbon dioxide emissions. Furthermore, the distribution of permits is not on the basis of ability to pay but on the basis of estimated or measured need. It is because the top-down control exerted is essentially social in character that it is disingenuous to claim the ETS as the market solution to global warming. It is because the total amount of emissions is specified at the outset due to social considerations wishing to avoid the adverse consequences of carbon dioxide that it is naïve to claim that it is immoral to hand out permits to pollute.
The ETS is actually not new. Also known as the cap-and-trade system (because of the cap placed on total permitted emissions), it has been in operation in the US for some years now to control sulfur dioxide and nitrogen oxides emissions. It has done a splendid job.
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