Greenhouse gas cap-and-trade programs should rely on auctions to distribute emissions allowances instead of giving them away to industry or "grandfathering" them, a panel of experts on the European carbon market told a U.S. Senate panel March 26. Carbon caps also should be firmly fixed over a long term, rather than frequently adjusted, they said. "An auction maintains the incentives in the right place," explained Raymond Kopp, Resources for the Future senior fellow. "You cannot go wrong with auctioning," he told the Senate Energy and Natural Resources Committee. Kopp added that auctioning is the most equitable way to distribute emissions allowances because it eliminates the ability of some industries to obtain advantages through the political process when they are grandfathered. The European Union started off its greenhouse gas cap-and-trade program in 2005 by grandfathering emissions allocations, giving companies emissions allowances for free on the basis of their historical emissions patterns. Now, however, the European Union is considering auctioning carbon credits, said Garth Edward, Shell environmental products trading manager. Panelists indicated that auctioning credits would be more fair and create a more robust price for carbon allowances. "It is important to have the right price signal," said Jean-Yves Caneill, Electricit\u00e9 de France project manager. The committee held the hearing to discover lessons learned in the EU's greenhouse gas cap-and-trade program under the Kyoto Protocol - the international treaty on climate change - as it fashions legislation to reduce U.S. carbon dioxide emissions. Given the European experience, a key committee in California last week announced that it likely would recommend that the state auction rather than give away emissions allowances as it sets up a carbon market under landmark climate change legislation (Circuit, March 23, 2007). Meanwhile, speaking before Congress, panelists also said that carbon trading is picking up in Europe. "The market is deep and liquid," said Edward. The volume of European carbon trades grew from $8 billion in 2005 to $27 billion last year, with 2008 emissions allowances pegged at $20.75 a ton. The increasing price of emissions allowances has stimulated European companies to invest in carbon dioxide abatement, said Per-Otto Wold, PointCarbon chief executive officer. He said a recent survey by his company shows that 65 percent of the sources covered by the European market have instituted abatement projects, compared to just 18 percent last year. The most common form of abatement so far has been to switch fuels from coal to natural gas, panelists said. The EU is coming to the end of a pilot trading program at the close of 2007. Under the pilot program, companies could trade no more than 5 percent of their allowances. The EU will begin a full-fledged trading program as part of its Kyoto Protocol commitment that will run from 2008 through 2012. The second phase of the program will cover more than 12,000 individual sources of carbon dioxide and allow them to trade up to 10 percent of their allowances, doubling the potential trading market.