The European Union Carbon Emissions Trading System: The Seed of a Global Emissions Regime?

So why hasn’t an ETS on carbon dioxide been set up in the US? Some of the concerns which have hindered such a development include uncertainty as how to how the initial allocation of allowances would work; the suspicion that the ETS would amount to energy rationing; and the apprehension that the ETS would disrupt the economy to disastrous effect.

These concerns have recently been disclosed to be without foundation. An MIT analysis (carried out by A. Denny Kellerman, a senior lecturer in the MIT Sloan School of Management; and by Paul L. Joskow, the Elizabeth and James Killian Professor at the MIT Department of Economics) commissioned by the Pew Center for Global Climate Change and involving extensive research funded by the Doris Duke Charitable Foundation has shown that the carbon dioxide ETS works efficiently and without harmful consequences to the macroeconomy. The carbon dioxide ETS involved-the first of its kind-is that of the European Union’s. The European Union was forced to avail of the ETS because European leaders realized in 2000 that they would be unable to meet their obligations under the Kyoto Protocol (which would take effect in 2008) unless they did something quickly. Since previous attempts to reign in carbon dioxide emissions through a carbon tax had failed, European leaders reluctantly decided that they would have to implement an ETS in carbon dioxide. They decided to experiment with the system from 2005 to 2007 so that they would have it running by 2008.

The experiment-carried out in desperation-has succeeded well. Although, not expected to significantly reduce carbon dioxide emissions in this experimental phase, the carbon dioxide ETS did, in fact, effect those reductions. Furthermore, those reductions were effected with “minimal” disruption to the European macroeconomy. This achievement has been all the more remarkable because, initially, data on installation emissions were not available and could only be estimated, in many instances (overly generously, as it later turned out); and certainly because of the scale and heterogeneity of the European ETS: With $80 billion worth of permits to trade, it involved 11,000 installations distributed in 27 independent nations constituting “a loose federal union” differing “widely in per capita income, market experience, institutional background, and other features.” By contrast, the sulfur dioxide ETS in the US involved only 3000 installations and $4 billion worth of permits. No better evidence of the robustness of this union of macrostable top-down control and microvariable bottom-up control could be given.

This robustness is only underscored by another lesson learned from the experiment: that trading across time seems to make the system work even better. By trading across time is meant that installations can save some of this year’s permits for use next year; or, conversely, they can borrow some of next year’s permits for use this year and not have them available next year. The experiment found out that trading across time did not result in the inability of installations to present permits as they became needed.

Because of the robust effectiveness of the ETS as demonstrated in Europe, it is now conceivable, the MIT analysis concludes, that it might just provide the necessary model, not just for a US ETS on carbon dioxide, but one for the whole world. It may take 20 to 30 years, according to Ellerman, but the EU ETS would seem to be ” “the sort of basic architecture towards which some sort of global climate regime would tend.” ”