Insights from the European Union Carbon Market
There have certainly been problems with the European Union Emissions Trading Scheme (EU ETS). Often mentioned as the biggest mistakes were the giveaway of permits to historic polluters and the too-lenient cap on emissions, which caused the 2007 price of carbon to fall to nearly zero.
Still, two recent reports highlight the successes of the European system. From a November 12th European Environment Agency press release:
A report by the European Environment Agency released today shows that the European Union and all Member States but one are on track to meet their Kyoto Protocol commitments to limit and reduce greenhouse gas (GHG) emissions.
Whereas the Protocol requires that the EU-15 reduce average emissions during 2008–2012 to 8 % below 1990 levels, the latest projections indicate that the EU-15 will go further, reaching a total reduction of more than 13 % below the base year.
Two of the ten insights:
Everyone will learn - Cutting carbon is a complex business subject to heavy lobbying; not all analysis, and not all design choices, will be right at the beginning. Not only government but also industry and other participants will learn in ways that enable the system to be improved over time. The EU ETS has benefited enormously from its design as a series of phases, each of which has allowed improvements on the previous one, particularly concerning scope and allocation.
GDP impacts are small - Thus far, the EU ETS has been able to achieve its environmental objectives at costs significantly below those projected, a small fraction of 1 percent of EU gross domestic product (GDP). Moreover, if auction revenue is used effectively to reduce distortionary taxes and to fund low-carbon investments, the cost impact on the economy can be eliminated or even create positive economic impact.