Study Hails Europe’s Cap-and-Trade

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Three years ago, amid a flurry of expectations and public controversy, the European Union instituted the world’s first cap-and-trade system to limit carbon emissions. Today, a Massachusetts Institute of Technology analysis of the EU Emissions Trading Scheme affirms that despite rather unstable beginnings, the system has been an unprecedented success, one particularly important in that it opens the door for skeptical countries — like the United States — to follow suit.

The ETS, which has been touted as one of the most important policy experiments of the last few years, is similar in many ways to the cap-and-trade systems currently operated by the U.S. for emissions of pollutants such as sulfur dioxide. In both cases, a limited number of emissions allowances are distributed to polluting facilities, and at the end of the stated time period, those that have emitted more than the limit must buy allowances from those that have managed to emit less. Companies therefore have a cash incentive to be cleaner, whether by creating a valuable commodity (sell-able allowances) or striving not to pay for emissions.

The MIT study was conducted by Denny Ellerman and Paul Joskow, both of whom were interested in using the results from the EU’s system to address U.S. doubts about the economic saliency of capping carbon emissions.

Their findings resulted in a list of lessons the U.S. can take from the EU example, first and foremost of which is that the economic drag of the ETS hasn’t been significant. Other key observations include the efficiency of “banking and borrowing” – a provision by which countries can either set aside allowances for later use or borrow them from the future – and the importance of looking at the system as a growing process, something that does not need to be worked out to perfection in order to be both functional and effective.

While the U.S. as a whole does not currently have a cap-and-trade system for CO₂ emissions, several factors suggest it may not be long before a plan similar to the ETS is instituted.

Two separate coalitions of states — the Regional Greenhouse Gas Initiative and the Western Climate Initiative — are founding members of the International Carbon Action Partnership, an organization dedicated to the development of carbon markets through the “implementation of mandatory cap and trade systems.”

Furthermore, Congress is currently considering the Climate Security Act, a bill that includes a cap-and-trade approach to CO₂ emissions and is sponsored by senators Joe Lieberman and John Warner. The real fate of a carbon cap in the U.S., however, will most likely lie with the next administration, rendering it yet another issue to consider when heading to the polls this fall. Both presumptive major party candidates have endorsed a cap-and-trade system, although they differ on how stringent a system to create.

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