European Carbon Trading Is Set For A Comeback
Just a few years ago, many thought the European Union's Emissions Trading Scheme was finished. With a deflated price of carbon, and the lack of international schemes to partner with, many in Europe were questioning whether setting up the scheme had been a mistake.
From article, (Europeans, in fact, had always been skeptical about whether market mechanisms were the best way to fight climate change. It was the Americans who pushed the idea in the late 1990s while the Kyoto Protocol was being negotiated.
The idea was that capitalism can solve the climate change problem much more efficiently than governments ever could. Companies are given a certain amount of free allowances to emit carbon, and anything beyond that they must purchase from the government or from other companies. There is therefor an incentive to emit less than your free allowances allow, because you can sell the remainder and make a profit. It was a very American invention.
In 2008, as the European Union was preparing to move from their ETS pilot phase to full trading, it was coordinating with people in the US Congress with the expectation that a similar scheme was on its way in Washington. In that year’s US presidential election, both Democrat Barack Obama and Republican John McCain were promising to start a carbon cap-and-trade system in America.
But it didn’t work out that way. In the intensely partisan environment that followed that election, Republicans in congress rejected Obama’s half-hearted attempt to create a US ETS in 2010. All plans for a US cap and trade system were dropped. The EU was left hanging on its own, stuck with a market mechanism that it was never enthusiastic about. And it was a system with significant problems.
An over-allocation of free allowances, combined with an economic slowdown, drove the price of carbon down. The price for purchasing an allowance to emit carbon fell to around seven euros per ton, far below the thirty euros per ton envisioned. Companies had little incentive to reduce their emissions, which was the point of the whole scheme. Emission credits were too cheap to buy.
The support for the system from European companies may not have been enough to save the system, were it not for the political support from carbon trading that has materialized around the world over the past two years - most importantly from Beijing.
This month China launched a national emissions trading system, uniting the handful of regional pilot schemes it has been conducting. It will initially only cover the power sector, but it will expand over time to eight sectors. The power sector is the source of almost half of China’s emissions. This means that the Chinese system will already be larger than the entire EU ETS.
China’s announcement followed another emissions trading declaration during the One Planet Summit in Paris this month. Leaders from several countries across the Americas — including Canada, Colombia, Chile and Mexico, as well as the US states of California and Washington - launched the Carbon Pricing in the Americas cooperative framework, with an eye to eventually linking their emissions trading schemes.
Suddenly, the EU’s pioneering system has found itself with potential partners to its East and West. There are now 42 national and 25 sub-national jurisdictions putting a price on carbon emissions across the world, and eight of them were launched since last year. For the first time, it looks like a ‘Global Coalition for Carbon Pricing’, which was called for at the 2015 Paris summit by former French President Francois Hollande, is a real possibility.)
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