TCS Daily

TCS COP11 Coverage: This Market Is Sending a Signal

By Ronald Bailey - December 6, 2005 12:00 AM

MONTREAL -- "Environmental effectiveness and minimum cost are two core building blocks for any long term modern climate policy," declared Olivia Hartridge, a representative from the Environmental Directorate of the European Commission. She was speaking on a panel on the European Union's Emissions Trading Scheme (EU ETS) at the United Nations' Climate Change conference in Montreal. The problem is that it is not at all clear the EU ETS fulfills either goal.

The EU launched its new carbon dioxide trading scheme this past January as a way to begin to meet its commitments to cut greenhouse gas emissions by 8 percent below what the EU emitted in 1990. The idea is to keep the earth's climate cool by cutting fossil fuel emissions that tend to warm the atmosphere. The EU ETS applies to 11,500 facilities that produce or use 20 megawatts of power, including electric power generation plants, refineries, metal foundries, and cement manufacturers. These facilities emit about 45 percent of the CO2 produced in Europe.

First, let's consider environmental effectiveness. The ETS has allocated 2.2 billion allowances to emit CO2 among the 11,500 facilities it covers. Speaking on the same panel, Abyd Karmali, an energy consultant with ICF Consulting, estimated that the allocations have lowered emissions by perhaps 50 million tons compared with what they would otherwise have been in a business-as-usual scenario. Even if all the cuts mandated by the Kyoto Protocol were achieved -- which Karmali estimates to be equal to a cut of 700 million tons of CO2 emitted per year -- they would spare the earth a negligible 0.02 to 0.28 degrees of warming by 2050. Reducing CO2 emissions by a mere 50 million tons clearly has no discernible impact whatsoever on the earth's climate.

And what about the core building block of minimum costs? Before CO2 trading began, models devised by consultants projected that the price of a ton of carbon would be under 10 Euros. Last January, the price for a metric ton of CO2 opened at around 5 to 7 Euros. However, the price rose steeply to nearly 30 Euros by September before settling back at around 22 Euros currently. Meanwhile European wholesale electricity prices have soared, rising from about 28 Euros per megawatt hour (mwh) to over 40 Euros per mwh during the past year.

Admittedly, a good bit of the increase is the result of the recent run up in natural gas and oil prices. But the high prices for CO2 allowances are also responsible for some of the increase. In order to meet their Kyoto Protocol commitments, Karmali estimates that European Union member states will have to cut their carbon emissions by 250 million metric tons per year between 2008 and 2012. This would clearly add even more upward pressure on the price of CO2 emissions allowances.

Ultimately, Europe's experience with a CO2 market is sending the world a signal about just how hard and costly it will be to cut greenhouse gas emissions.

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