European carbon trading labelled 'model for the world'

Pricing Carbon book

Europe's carbon trading scheme is making big windfall profits for industry but not reducing carbon emissions

The world’s first carbon trading scheme should be used as a model for global cap-and-trade says leading American economist

The EU’s carbon trading scheme can be a model for the rest of the world says a leading economist advising the US Senate on cap-and-trade.

The European Emissions Trading Scheme (EU ETS), the world’s first attempt to limit CO2 emissions by trading the right to pollute, reduced carbon emissions by 300 million tonnes in its first three years, says economist Denny Ellerman in his new book Pricing Carbon. 

Launched in 2005, the EU ETS involves national governments putting a cap on the emissions of polluting industries and allocating permits that can be bought and sold by companies.

Windfall profits

It has been criticised for giving companies too many free credits, allowing them to generate ‘windfall profits’ by selling their free permits and for failing to generate more investment in green technology.

In a report last month, the UK Environmental Audit Committee (EAC) said the emissions cap was set too high allowing emittors to easily meet targets.

Dr Ellerman said that reducing allocations was already tightening the cap and that the scheme never promised to bring price stability to the carbon market.

‘If you want to have a set price for carbon then go ahead and do one, but you only have to look back to the year 2000 when the UK suspended the escalating fuel tax to see that the political support is not there,’ he said. 

Trading can work

He also rejected criticisms that companies had wrongfully received ‘windfall profits’ by selling permits given to them for free.

‘It was the price of getting the system going. It’s what I would call buying consent. You can look at this as very tawdry in a democratic system but I would argue this is what a lot of politics is all about,’ he said.

But Ellerman’s praise for the flagship emissions trading scheme has been rejected by environmentalists who say that carbon trading is a ‘critically floored mechanism.’

‘It is not driving investment in green technology and has actually led to a chill on other methods of reducing emissions,’ said Sarah Jane Clifton from Friends of the Earth.

Tax and regulation

‘There is an urgent need for direct interventions through regulation and taxation to address the shortcomings of the EU ETS and drive real emissions reductions in Europe,’ she added. 

Clifton also rejected that the European scheme could be rolled-out globally.

‘If you just look at basic climate science and the time we have left to peak and decline global emissions, setting up and linking up global emissions trading schemes is totally unfeasible.'  
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