Interesting Lessons from the EU Cap and Trade Scheme

In a really interesting recent post by Sandbag, a UK-based organization that buys and retires credits from the EU Emissions Trading Scheme, the organization analyzed newly released 2009 data about drops in the emissions covered by the EU scheme.   On the good news front, emissions that are covered by the EU scheme have dropped 17 percent over a two year period.   Not surprisingly, however, the large drop in emissions appears to be driven largely by the recession, not by permanent and ongoing emissions reductions.  Moreover, the emissions did not drop uniformly across sectors.  Instead, the steel and cement industries, according to Sandbag, saw really dramatic drops that left them with a large excess of credits (30 percent above what they actually used).  By contrast, the power sector saw emissions drop by 8 percent last year but still needed additional credits to meet the overall emissions cap.  What’s also interesting about the emissions reductions is that the drops mean that emissions in 2009 were  significantly lower than the caps established by the EU for this phase of trading (Phase II).

These data raise several issues.  First, given that much of the drop is due to economic stagnation as opposed to serious and permanent emisisons cuts,  carbon allowance prices have dropped dramatically from 30 Euro in 2008 to around 12 Euro currently.   With prices so low, will the technological innovation and investment in energy reducing activities that a price in carbon is supposed to induce occur?  Second,  will the banking provisions of the EU Trading Scheme undermine future innovation?  As Sandbag points out, because of the large drop in emissions well below the caps a significant number of unused allowances remain that have been “banked” and can be used in future years.   That means that when the economy picks up, the cement and steel industries in particular can use “banked” credits rather than making actual cuts in emissions in order to meet emissions targets.

Banking provisions are included in Waxman-Markay and supported by a wide array of policy analysts.  The theory is that  allowing credits to be borrowed and banked promotes the most efficient reductions by allowing for emissions reductions across time rather than forcing reductions in an artificially limited period (a year, for example).  And the cost of emissions reductions shouldn’t fluctuate wildly due to exogenous factors, including economic downturns or upturns.  To put it in the words of Resources for the Future fellows Harrison Fell and Richard Morgenstern,

Ideally, the discounted cost of reducing the last ton of emissions should be the same across different years as would occur under a carbon tax that rises over time at the rate of interest.

But if emissions occur due to an economic slowdown rather than because of aggressive changes in technology or energy efficiency, could the effect of the banking provisions in the EU simply mean that real emissions reductions are delayed even further as industry simply uses its banked allowances?  Or that, as Sandbag argues, the EU can afford much tighter caps than the current goal of 20 percent reductions by 2020? Finally, does the fact that prices in the allowance market have falled dramatically support proposals for price floors for allowances in order to maintain a sufficient price to induce technological innovation?  I’d be interested in reactions to these questions.

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Reader Comments

10 Replies to “Interesting Lessons from the EU Cap and Trade Scheme”

  1. Yet another reason I buy the Breakthrough Institute’s analysis, i.e. cap and trade policies aren’t likely to get us where we need to be; we need a much more technology-driven set of policies to supplement this architecture.

  2. The drop in emissions reported in this article did not achieve any verifiable corresponding reduction in atmospheric temperature and there is no evidence of any climate mitigation whatsoever. Likewise, there is no solid evidence that atmospheric temperature would have been effected if carbon dioxide emissions had increased instead of decreasing.

    This disconnect between cap & trade and verifiable atmospheric temperature control illustrates the basic flaw with all attempts to control the climate, and underscores the deception and ignorance behind such attempts.

  3. bqrq

    It is not surprising at all that the temporary, one-year drop in emissions from one part of the world would not result in, as you put it, “any verifiable corresponding reduction in atmospheric temperature.” First, the drop in emissions from the EU results overall in a reduction in the growth rate of overall CO2 concentrations in the atmosphere — that is because of the long residence time of CO2 once it is in the atmosphere (at least 1000 years). Second, even if overall CO2 concentrations in the atmosphere drop, there would nonetheless be a long delay before temperatures dropped, because of the high heat capacity of the oceans. In other words, there will necessarily be a long delay between changes in human emissions of CO2 and overall changes in both CO2 concentrations in the atmosphere and temperatures on the planet. That will be the case even if there is a strong connection between CO2 emissions and global climate change. Thus, contrary to your argument, the lack of any immediate changes in global temperature does not prove anything one way or another about the connection between CO2 and global climate change. However, that delay will likely create political problems for any efforts to regulate carbon emissions as many people will have your reaction and wonder why regulatory efforts have not had an immediate impact on the global climate system. For more details, you can read an article I wrote about this at:

  4. Thanks, Eric, for the response to bqrq. Still puzzling, though, over whether banking is a great idea given the fact that the emissions drop is the result not of investment in new technology or improvements in energy efficiency but simply as a result of less economic activity. Perhaps the answer is that banking is fine but that either the cap needs to be tighter or that we need a price floor in order to mitigate against price volatility and to spur innovation.

  5. There is no solid scientific evidence or proof that regulating carbon dioxide would actually cause a reduction in atmospheric temperature at some point in the future. Instead we have speculation and conjecture about the “possibility” of controlling temperature. There is no hard evidence that atmospheric temperature control could be successfully accomplished by various schemes such as cap & trade, sequestration, carbon taxes, solar energy, etc. The good news is that common sense has finally prevailed and this has delayed efforts to regulate carbon dioxide. Hopefully, this climate fad will eventually fade away.

  6. To emphasize a point in Eric’s comment: Recession or no, CO2 levels increased in the atmosphere in 2009. The rate of increase may have slowed in 2009, but levels didn’t decrease. (I suspect that worldwide emissions dropped from 2008 to 2009 because of the global economic slump. Does anyone know? But annual emissions are not the same as CO2 levels in the atmosphere, a distinction I’m not sure bqrq understands.)

    If I supported cap and trade, which I don’t–at least not as outlined in Waxman Markey–I would support banking. Cap and trade is a market oriented approach to emissions control. Banking is one way markets even out highs and lows in demand. (Without banking, wouldn’t the value of Eurpean credits have dropped even lower?) Any reduction in CO2 emitted is a real reduction–whether from investments in efficiency or due to an economic slump. The atmosphere will recognize no difference.

    I do have some questions about banking. Given that CO2 has a limited life in the atmosphere, does an emissions credit for a ton of CO2 remain a credit for a full ton over time? It seems like the economic value could go up or down (depending on the market and the reduction in credits available in future years) but shouldn’t the amount of CO2 a credit represents drop over time?

    Waxman-Markey is, to say the least, not exactly carbon neutral. It favors dirtier fuels with substantial free credits. It provides an incentive to maintain, rather than replace, old, inefficient plants as a source of credits that can be banked or sold. A utility in the North Carolina recently decided to retire 11 older coal fire power plants rather than clean them up. This in spite of the fact that the plants represent a potential source of carbon credits under cap and trade.

  7. Dear desertorosso;
    Thanks for making my point. Banking is no more credible than cap & trade as an effective means to control atmospheric temperature. Neither has been scientifically proven to work. Your arguments are simply familiar conjecture, speculations and suppositions that are unsupported by facts. Humanity can not control the climate, it can only adapt.

  8. “… could the effect of the banking provisions in the EU simply mean that real emissions reductions are delayed even further …?”

    Yes, but as long as the cap is achieved, why should “real emissions reductions” not be delayed? Cap-and-trade operates fundamentally to achieve a predetermined emission target at the lowest possible cost — irrespective of whether the target requires real reductions. The collapse of European carbon prices (like the recent collpase of U.S. SO2 prices) merely indicates that the policy is doing exactly what it is designed to do.

    A more salient question is this: Should the primary objective of regulatory climate policy be to (a) achieve a predetermined emission target at the lowest possible cost, or (b) achieve the lowest possible emissions at acceptable cost? If the former, then price collapse is a good thing; if the latter, then cap-and-trade is not the right tool for the job.

    An illustrative alternative approach is Germany’s feed-in tariff program, which is probably doing far more to stimulate innovation than cap-and-trade could. These two regulatory approaches are inconsistent and incompatible: Feed-in tariffs interfere with the market’s ability to find least-cost emission reductions; while cap-and-trade nullifies the environmental benefits of feed-in tariffs by allowing any resulting emission reductions to be traded for more emissions elsewhere. Such perversities result when regulatory instruments having fundamentally inconsistent and contradictory policy objectives are combined.

    A regulatory mechanism similar to feed-in tariffs, but implemented within a carbon-pricing framework, is described in a recent Energy Policy paper: A decarbonization strategy for the electricity sector: New-source subsidies.

  9. If you think conjecture, speculation and supposition unsupported by fact help make your points, you’ll find no argument here. Really, do you even read this stuff before you post it? Ignorance, hysteria and lies, oh my!

  10. Dear desertorosso;
    You make a good point. Our input on a forum like this is largely limited to conjecture. This is not a place for deep analysis and exposition of technical data. I encourage everyone to contribute in a meaningful way to help others during the brief span of this present life, and not to worry about cosmic issues which we have no control over. May God Bless.

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About Ann

Ann Carlson is currently on leave from UCLA School of Law. She is the Shirley Shapiro Professor of Environmental Law and was the founding Faculty Director of the Emmett I…

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About Ann

Ann Carlson is currently on leave from UCLA School of Law. She is the Shirley Shapiro Professor of Environmental Law and was the founding Faculty Director of the Emmett I…

READ more