European Cap-And-Trade Example

  • Europe was the first to do carbon cap-and-trade, four years ago. (Photo courtesy of NASA)

Congress is haggling over a climate
bill that includes a carbon cap-and-
trade system. In many ways, it’s
similar to the one the European Union
put in place several years ago. Liam
Moriarty looks at what
the European experience has been and
what the lessons for the US might be:

Transcript

Congress is haggling over a climate
bill that includes a carbon cap-and-
trade system. In many ways, it’s
similar to the one the European Union
put in place several years ago. Liam
Moriarty looks at what
the European experience has been and
what the lessons for the US might be:

Slashing greenhouse gas emissions is hard. Our economy is powered mostly by fossil fuels. Switching to clean fuels will be disruptive and expensive, at least to start with.

So how do we get from here to there? The approach that’s proving most popular is what’s called “cap-and-trade.” It works like this – first, there’s the cap.

“We’re going to put an absolute limit on the quantity of carbon-based fuels that we’re going to burn. And we’re going to develop a system to make sure we’re not burning more fossil fuels than that.”

Alan Durning heads the Sightline Institute, a sustainability-oriented think tank in Seattle. He explains that once you put the cap in place…

“Then, we’re going to let the market decide who exactly should burn the fossil fuels based on who has better opportunities to reduce their emissions.”

That’s the “trade” part. Companies get permits to put out a certain amount of greenhouse gases. Outfits that can cut their emissions more than they need to can sell their unused pollution permits to companies that can’t.

The cap gets ratcheted down over time. There are fewer permits out there to buy. Eventually even the most polluting companies have to reduce their emissions, as well.

The goal is to wean ourselves off dirty fuels by making them more expensive. And that makes cleaner fuels more attractive.

Europe was the first to do carbon cap and trade, four years ago. And things got off to a rough start. They set the cap on emissions too high and way overestimated the number of permits – or allowances – that companies would need.

“We have too many allowances. Simple supply means that the prices of those allowances crashes. They don’t have much value, and therefore the price went down to close to zero.”

That’s Vicki Pollard. She follows climate change negotiations for the European Commission. She says the whole system got knocked out of kilter.

For the first two years, European carbon emissions actually went up. After the collapse of Phase One, big changes were made. The next phase of the trading system has a tighter cap, more stringent reporting requirements and enforcement with teeth.


Today, Europe’s on track to meet its current emissions target. But environmentalists, such as Sanjeev Kumar with the World Wildlife Fund in Brussels, say those targets are still driven more by politics than by science.

“We have a cap that’s very weak, i.e. that means that it doesn’t mean that we’re going to achieve the levels of decarbonization that we need within the time scale.”

Leading climate scientists say we have to cut greenhouse gas emissions to 80% below 1990 levels by the middle of this century to avoid catastrophic climate change.

Business still has concerns about the EU cap and trade scheme. Folker Franz is with BusinessEurope, sort of the European version of the US Chamber of Commerce. He says companies worry about the additional cost of carbon emissions putting them at a competitive disadvantage.

“If you produce one ton of steel, you emit roughly one ton of CO2. So any ton of steel produced in the EU is right now some 17 dollars more than outside the European Union. And that makes a difference.”

But, Franz says, European businesses accept the need to take prompt action on climate change and are on board with the stricter cap and trade rules coming over the next few years.

Americans have watched Europe struggle with carbon cap-and-trade. The Sightline Institute’s Alan Durning says we can benefit from Europe’s willingness to break new ground.

“It was a big advance when they started it, because nothing like it had ever been done. But, it’s not the be-all-and-end-all. In fact, the United States now has an opportunity to learn from their mistakes and leapfrog ahead to a much better climate policy.”

Durning says an American cap and trade system could avoid the costly stumbles that’ve hampered Europe’s carbon reduction efforts.

For The Environment Report, I’m Liam Moriarty.

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