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Catching Europe's Cold

Fortnightly Magazine - August 2009

When prices for emissions allowances collapsed in Europe’s carbon market a year after trading began, critics said the collapse proved a regulatory product couldn’t be traded internationally. Sure, they said, the U.S. acid-rain market worked, but it was never an international market—and it couldn’t be, given the propensity for governments to protect their own economies.

That’s what happened in Europe, when EU member states overestimated their future carbon emissions, creating more allowances than their industries really needed. Rampant sandbagging virtually guaranteed carbon prices would collapse, as they did in early 2006. Since then, Europe’s carbon prices have recovered to only about 15 Euros per ton—below their €33 high before 2006, and far below the U.S.$50/€$36 a ton that many analysts consider the minimum necessary to begin the low-carbon revolution.

This weak price recovery might prove carbon-market critics correct, or perhaps it merely shows the modest value of free allowances, during a recession, in a market full of “grandfathered” emitters. The answer might remain unclear until 2013, when the more stringent phase 3 of Europe’s emission trading scheme (ETS) begins and a greater share of allowances will be auctioned rather than given away as they were in phases 1 and 2. Plus, if the EU’s proposed reforms are accepted, then the EU and not individual member states will be in charge of setting emissions caps.

Now that the U.S. House of Representatives has for the first time approved mandatory greenhouse-gas constraints, the sickly history of the ETS becomes particularly worrisome for America. Will the Waxman-Markey bill—the American Clean Energy and Security Act—avoid the ills that have plagued the ETS? To find out, Fortnightly turned to one of Europe’s foremost experts on carbon cap-and-trade; John Scowcroft heads the environment and sustainable development policy unit at EURELECTRIC—roughly Europe’s version of an Edison Electric Institute.

 

Fortnightly: How does the Waxman-Markey approach compare to the EU’s emissions trading scheme (ETS)?

Scowcroft: Clearly the similarities are the cap-and-trade system and allocation of carbon credits. The European cap is more ambitious, but we’re starting from different places. The key questions will be whether we have equivalence in emissions credits, and whether monitoring, reporting and verification are equivalent to those in the ETS. If you’re comparing schemes, those are the things to look at. Do we have the same product?

From the power industry’s point of view, we’re looking at two different sorts of markets. By and large, in the United States you have regulated tariffs, and in Europe we have liberalized competitive markets, where the market sets the price. The differences between the two schemes takes that into account.

 

Fortnightly: How does Waxman-Markey account for the U.S. regulated structure?

Scowcroft: One of the big issues in starting a cap-and-trade scheme is that you’re changing the ground rules, and you’re looking at the possible problems of stranded assets as you move to a market where carbon has a price. The way Europe handled that is different from the way Waxman-Markey is seeking to do

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