TCS Daily

Steal These Emissions

By Kim Eskildsen - February 23, 2005 12:00 AM

The EU recently launched its latest bureaucratic Leviathan: a so-called market for emissions trading. Using the word "market" might indicate a degree of voluntary participation on behalf of the companies involved. But that is not the case here. The EU system has instead installed a bureaucratic monster enforcing a reduction in energy usage based on the assumption that the world's climate is changing dramatically due to the use of fossil fuels. This theory is at best dubious, but what is even worse is that the prescribed cure might be even less convincing than the diagnosis.

Cutting energy use can be good if it helps a company reduce expenses, but not if it also harms productivity. Under the Kyoto Protocol, which took effect last week, the EU is going to be weakened economically. China and India and other vibrant economies are going to increase their greenhouse gas emissions during the years to come, and that will more than offset any savings by less competitive European countries.

Remember that Third World countries were excused from the Kyoto agreement, Russia was indexed very favourably, and the US is not going to sign on. This means, according to my calculator, that the European Union member countries must prepare for a back-to-nature experience.

The market for emissions trading is based on the idea that certain business sectors will pay the price for all of us. Despite being nominally a "market", the system already seems Soviet-like in its shape, demanding that companies obtain permits just to produce (which is called pollute in the anti-business universe). Then a national authority monitors and defines permits and enforces strict rules. A company will be fined €100 for every 100 tons of emissions not reached at the end of the year.

The system has many built-in weaknesses. For instance, a country can import energy from other countries in order to reduce its consumption. Energy production is being exported to the east - imagine a chain of power stations stretching to Russia. According to an expert at the Danish Industry Association, Luxembourg has simply shut down its energy production and is now importing all its energy. Obviously not all energy production could be moved to China. But it is a contest pitting political sanity against an artificial market; the taxpayers of the EU are ultimately going to lose.

Companies that stay in the EU must build up a comprehensive measurement system and national authorities will control the measuring and administer the incoming reports. The system will vary from country to country - the states with the most effective administration and most zealous environmental authorities will suffer the most. The system's implementing years are 2005-2008. Afterwards EU countries will have to reduce their energy spending by around 30 percent compared to today.

The system will become increasingly bureaucratic and will consume the energy and productivity of the companies involved. Needless to say the penalty system is going to add even more to member state budgets, and the result is going to be the usual one: a reduction of GDP, an increase of unemployment, a slow-down of technological development (which will make it more difficult to develop new and cleaner energy sources), and last but not least the increase of government and decrease of individual liberty.

The author is a fellow at MarkedsCentret think tank in Denmark


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