The “success” of the EU’s climate policy has long been a talking point for those who want Congress to enact energy-rationing legislation to fight global warming. If Europe can do it, they assert, then so can the U. S.
In trying to shame the Congress into expensive-energy climate policies, global warming alarmists are abetted by European leaders, who routinely admonish countries like the United States, Japan and Canada for not keeping up with the EU’s efforts on climate change.
The problem with this line of reasoning employed by alarmists and Eurocrats alike is that the EU’s marquee climate policy—the Emissions Trading Scheme(ETS)—is a disaster.
The ETS is a cap-and-trade policy that works by having government assign emissions quotas (caps) to thousands of industrial users and suppliers of energy. As the cap shrinks, companies would have to find new ways to cut their carbon footprint. In any given year, if a company's emissions exceed its quota, it could avoid a penalty by purchasing surplus emission rights from a business that beat its target. The entire point of a cap-and-trade policy is to make businesses and consumers pay for carbon dioxide emissions. Because carbon dioxide is analogous to energy use, a cap and trade increases energy prices.
The EU ETS occurs in three phases: phase 1, 2005-2007; phase 2, 2008-20012; and phase 3, 2013-2020. Phase 1 was an abject failure, owing to a gross misallocation of free carbon emissions credits that led to a meltdown in their price, from 40 dollars a ton to 40 cents a ton. At that price, there was no incentive for companies to reduce emissions, which is why Europe’s greenhouse gas output increased by 2% during phase 1.
Phase 2 is supposedly much tougher than phase 1. Emissions caps have been slashed and the penalty for non-compliance has been increased significantly. That said, Phase 2 began only recently, in mid 2008, so it is still unproven.
In any case, EU leaders have postponed significant emissions cuts until phase 3 because they want to first negotiate an international climate change treaty to succeed the Kyoto Protocol, which is set to expire as phase 3 begins, in 2012. Otherwise, EU leaders would subject European industries to higher energy prices, and therefore a competitive disadvantage in the global marketplace.
For phase 3, EU leaders have promised to expand the ETS to energy intensive industrial sectors that now enjoy exemptions from carbon trading, like steel and aluminum manufacturing. They have also promised to auction nearly all the emissions credits, whereas governments can only auction up to 10 % of the credits during phase 2, and they could auction only 5 % of the credits during phase 1 (only four of the 25 EU countries opted to auction credits in phase 1).
But Phase 1 is already in jeopardy, four years before it is slated to begin. Yesterday, the Financial Times reported that Germany, the EU’s largest economy, has indicated that it will opt-out of the next phase of the EU ETS, by granting heavy industry free carbon permits after 2013. The article quotes Merkel as saying that she “could not support the destruction of German jobs through an ill-advised climate policy”.
The auctioning of permits was supposed to ensure that the sort of misallocations that plagued phase 1 of the ETS could never occur again. If businesses have to pay to emit, then they would have the incentive to reduce their carbon footprint regardless of what their cap was.
Now Germany has opted out of the emissions auction in phase 3. The rest of the EU is likely to follow. Of course, it is unlikely that a plan to fight climate change can work if it excludes the largest emitters of greenhouse gases thought to cause rising temperatures.
EU climate policy is described as a model for the world to emulate, but it’s actually a warning for the world to heed. The ETS has demonstrated that “doing something” about global warming is expensive and difficult. It also indicates that states are unwilling to bear much of a burden to solve the supposed climate crisis.
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