Tuesday, September 29, 2009

Is the ETS economic suicide for Europe? The NYT investigates

Europe leads the world in terms of environmental regulation via the European Trading Scheme (ETS).

Has the cost to competitiveness really been worth it given the increase in emissions from China, India and the US? Surely something is better than nothing but what about those who have lost their jobs because of the ETS (but what about all those nice new shiny green jobs?).

An expansion of the ETS across the globe would be great but politically next to impossible.

E.U. Alone and Lonely on Carbon [New York Times]

BRUSSELS — Carbon trading put the European Union in the environmental vanguard.

Since 2005, the trade bloc has operated the world’s only continentwide system that puts a cap on greenhouse gas emissions and that requires major polluters to hold tradable allowances.

But the system has also been the most “costly climate policy program in the world,” according to Jürgen R. Thumann, the president of BusinessEurope, a powerful confederation of industry and employer groups.

Mr. Thumann said European business leaders are desperate to expand the system to the United States and eventually across the globe to reduce the “dangers to our ability to compete internationally.”

But with talks on a new global climate treaty seemingly at a stalemate, and with climate legislation delayed in major polluting countries like the United States and Australia, those prospects look increasingly distant.

Meanwhile the E.U. shows no sign of abandoning the system, leaving business leaders like Mr. Thumann with little choice but to speak out at home and to press developed nations abroad to match Europe’s efforts when they gather at the U.N. summit meeting on climate change in December in Copenhagen.

Carbon trading was supposed to be the least costly way for Europe to cut emissions. The idea is that industries buy allowances to emit greenhouse gases if they exceed a certain quota or sell them if they have too many.

But Europe’s relationship with carbon trading goes much deeper than economics, and “is now rooted in the bloc’s aspirations to global leadership,” said Bernice Lee, an expert in energy and environment at Chatham House, a research institution in London.

After the United States declined to ratify the Kyoto Protocol in 2001, Europeans swung their weight behind the treaty, which was the first major attempt to limit emissions globally. As part of those efforts, Europe supported a bid by Russia to join the World Trade Organization.

Vladimir Putin, as Russian president, reciprocated by supporting Kyoto. The treaty required ratification by countries producing at least 55 percent of the world’s greenhouse gases and support from Russia, with its large share of emissions, allowed the treaty to take effect.

More recently, the E.U. authorities have identified carbon trading as a way of raising huge sums of money demanded by developing nations as part of any new global climate treaty.

Ms. Lee of Chatham House said there was “a strong and growing appreciation by E.U. governments” that the revenues generated from selling pollution allowances could help them to balance their own budgets, as well as fund climate-related initiatives.

Even as European nations deepen their reliance on carbon trading, governments elsewhere still are struggling to put such systems in place.

In the United States, legislation to set up carbon trading is stuck in the Senate, which probably will not act until next year. In Australia, the government could call an election on the issue if the legislation fails to pass on its second attempt in November.

In Japan, a new government wants to introduce carbon trading but faces stiff resistance from industry as the country emerges from its deepest postwar recession.

Another factor that continues to muddy the prospects for carbon trading are reports of abuse and manipulation.

In August, it emerged that British customs officials had arrested seven people near London for dodging a value added tax, which should have been paid for selling large amounts of allowances.

In a bid to stop similar cases in the future, Britain, France and the Netherlands have exempted carbon trading from the levy.

Last week, an E.U. court ruled that Poland and Estonia could challenge the European Commission’s assessment of how many allowances their industries were entitled to. That stoked fears among traders that those governments would take advantage of the ruling to issue larger numbers of allowances to favored industries than was originally permitted.

E.U. officials sought to quash speculation about the long-term stability of the carbon markets by saying governments would no longer have the same right to intervene after 2012. But prices of allowances still fell sharply on carbon markets.

Perhaps the thorniest problem for E.U. environment officials is how to make the system more palatable for business without entirely neutering its chances of cutting emissions.

Stavros Dimas, the E.U. environment commissioner, pushed forward this month with plans to continue giving large amounts of allowances away free to industry sectors most exposed to international competition.

The French president, Nicolas Sarkozy, said this month that he and Angela Merkel, the German chancellor, were proceeding with plans for a “border adjustment tax” on imports from countries without targets and trading systems comparable to those in Europe.

Mr. Sarkozy’s approach is sure to stoke tensions with some of the Continent’s major trading partners. Such taxes could start even start a protectionist backlash – a prospect that compounds Mr. Thumann’s concerns about the effects of carbon trading on European competitiveness.

“Climate protection is one of the saddest examples of a failure by leading nations to coordinate responses,” said Mr. Thumann of BusinessEurope. “We’ve got to have closer international cooperation to reduce emissions cost-effectively,” he said.


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