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A New World Order

GREENHOUSE-GAS EMISSIONS
Fortnightly Magazine - February 2005

within the ETS. Thus, an installation within the EU that needs to reduce its CO 2 emissions can obtain the needed allowances through the lowest-cost option available. In lieu of undertaking expensive pollution reductions, this might involve funding an emissions project outside the EU in a nation that has adopted Kyoto, either in a non-EU industrialized country like Russia (through the JI mechanism) or in a non-EU developing country like a Caribbean nation (through the CDM mechanism). In this way, the most economically efficient option for emission reductions can be pursued. However, because the United States has elected not to ratify Kyoto, American companies with installations in the EU are subject to CO 2 emissions caps but cannot take advantage of low-cost emission reductions at their facilities in the United States or elsewhere. This disavantages American companies in the EU.

Trans-Atlantic Emissions Trading: The Future of RGGI

Because the impact of CO 2 emissions and similar pollutants, like ozone-depleting substances, are global in scope, the location of emission reductions is immaterial. The nature of CO 2 is such that cap-and-trade programs can be linked together to expand the number of opportunities for efficient emissions reductions and thereby reduce cost. In recognition of this, the EU's recently adopted Linking Directive expressly directs that the EU Environmental Commission to explore opportunities for mutual recognition of CO 2 allowances generated by other mandatory greenhouse-gas emissions trading schemes. Talks on linkage began in May 2004, when the Northeast states met with a British delegation. More recently, at the December 2004 COP 10 meeting in Buenos Aires, RGGI and EU representatives discussed their desire to link CO 2 allowance trading programs. The EU also is exploring the possibility of linkage with the CO 2 allowance program of the Australian state of New South Wales.

It is possible that states located outside the Northeast region will join the RGGI effort. The most likely candidate states are the West Coast states of California, Oregon, and Washington. In November 2004, they announced their own regional global warming initiative that will likely include a regional CO 2 cap-and-trade program similar to RGGI. In fact, representatives from the West Coast initiative are participating in the RGGI meetings. Collectively, the West Coast states' CO 2 emissions of 491 MMTCO 2 are roughly comparable to the RGGI states. Combining both the Northeast and the West Coast into a single cap-and-trade program would represent 1,018 MMTCO 2 emissions, according to the same 2001 Oak Ridge National Laboratory data, or nearly the emissions level of Japan. Linking emissions trading systems on the West and East Coasts is therefore logical. Most of the RGGI states, and California and Oregon have adopted mandatory CO 2 reduction legislation. Nearly all of the RGGI states also have adopted California's tough new tailpipe standards for cars and light-duty trucks. RGGI offers the prospect for other states and nations to join in a larger cap-and-trade program that would force the United States to adopt federal legislation to avoid severe electricity market distortions and the disruption of interstate commerce.

All told, the past