EU Cap & Trade Lessons for CA

By Published On: July 11, 2008

The European Union’s carbon cap-and-trade program aimed to create a level emissions playing field and place a price on carbon, said Iain Morrow during a July 9 California Air Resources Board presentation on the trading scheme. Morrow, who is on loan to the Air Board from the United Kingdom government, compared and contrasted the European program with a possible California emissions trading system. Morrow noted that an EU-wide carbon tax was discussed, but ultimately not accepted because member states jealously guard their taxing authority. He emphasized that a carbon trading system–such as Europe’s or one in California–is just one of many policy tools available for curbing global warming. “Obsession with markets sometimes obscures how cap-and-trade works.” Morrow, who worked on the United Kingdom and EU carbon trading programs, also noted the importance of government’s role in advancing energy efficiency and research and development. He also pointed out pitfalls to help state policy makers avoid similar mistakes. The UK program, which preceded the European one, failed to curb carbon emissions because of an over allocation of credits. The European market also failed to cut global warming gases because many member states gave away too many credits to protect their industries. Another problem was that industry reaped windfall profits because the credits were given away for free and not auctioned. As a result, the next phase of the EU trading scheme will involve auctioning off most of the emission credits. The volatility in carbon prices in the European market was not considered significant, with Morrow noting that price in the natural gas and coal markets bounced around more. The price of carbon is estimated to be $40 per metric ton, with the total market valued between $78-80 billion. In contrast, a California trading program is estimated at a value of $17 billion and a federal one at $200 billion. The lion’s share of emissions under the European trading scheme is from the power sector–making up about two-thirds of the market. Other players include the cement, oil, gas, iron, and steel industries. There is no strong push to cover Europe’s transportation sector under a trading market. That is largely because it emits about one third of what California vehicles emit, Morrow said. In California, transportation is the largest emitter of greenhouse gases, producing about 38 percent of state emissions.

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