Some local and national environmental policy advocates are arguing against a cap-and-trade approach as the backbone of a U.S. policy to reduce greenhouse gas emissions because they perceive, erroneously, that the European Union’s Emission Trading System has “failed.” The European cap-and-trade system has not failed. Emissions reductions under the system are now expected to fall by 25 percent below 1990 levels by 2020, better than the targeted 20 percent reduction and better than the predicted U.S. achievement. Europe is also adopting more stringent caps for 2030, a 40 percent reduction from 1990 levels, and has reduced the number of permits available by almost a billion tons.
The perception of failure arises from the low current price for permits to emit carbon. A low price doesn’t indicate failure. It is mostly the result of the economic slump in Europe, which has reduced the demand for energy and, hence, the demand for permits far below what was forecast back in 2008, when permits were issued. That’s just supply and demand, right out of Economics 101. The objective of the system is to reduce emissions on target, not to raise energy prices. Achieving that objective at relatively low permit prices is not an indication that the system has failed.
Carbon permit prices in Europe have also been depressed by renewable energy subsidies and mandates that were not coordinated with the emission trading system and have forced utilities to use expensive renewable energy options even when their emissions were below the applicable caps. The German feed-in tariff, for example, has driven up retail electricity prices substantially in that country. The result has been low permit prices and high electricity prices. Europe has recently adopted policies to coordinate climate and renewable energy policies while tightening emission targets.
The European Emission Trading System is by no means a perfect model for an American cap-and-trade system. In fact, the experts who created the carbon cap and trade systems in California and the Northeast, which are working well, learned a great deal from the European system about what not to do. America can also look to the permit trading system underlying the Acid Rain program, which has been successful for decades. (Who hears anything about acid rain anymore?) Whatever might be the strengths and weaknesses of Europe’s system, serious consideration of our own options should not be influenced by a misunderstanding of the European experience.
Robert Repetto is a Senior Fellow of the Climate and Energy Program of the United Nations Foundation. He lives in Boulder.
