Vox Polis

Yet again the US has outperformed the EU, according to this week’s The Business. But for once it’s not an article criticising the EU for its poor economic growth or its excessively high unemployment. This time the US has beaten the EU at its own raison d’etre: Climate Change.

According to the Business, the US has kept CO2 emissions constant, whilst they have continued to rise in the EU. It puts this down to the high proportional increase in fuel prices in the US which have encouraged innovation and the move towards lower emission technology. Whether this trend will continue remains to be seen.

The situation in the EU is worrying. The EU prides itself on its environmental credentials and often takes the international lead on new regulatory mechanisms to reduce mankinds environmental impact (see the RoHS and WEEE directives). Even though the EU has introduced a market based mechanism to tackle CO2, the Emissions Trading Scheme (ETS), emissions have continued to rise.

ETS gives businesses carbon permits to cover their CO2 emissions. If businesses reduce their CO2 they can then trade permits with other businesses that emit too much. This is much in line with the polluter pays principle. The scheme is a great initiative on paper: in economist terms it is efficent, and has the advantage of the double dividend: improve the environment and help economic growth. However in pratice the EU has created an overregulated and burdensome mechanism that has so far had little impact on emissions.

The EU’s biggest mistake was giving the permits away for free to each business instead of auctioning them off. Giving them away for free basically transfers permits to a business that are worth millions of euros, and could be seen as a form of state aid. According to the Sunday Telegraph, this allocation has meant that businesses, including Esso and other oil companies, have made millions out of the scheme.

Instead of auctioning the permits, the EU member states formed burdensome National Allocation Plans to distribute the permits to the different sectors in the scheme. However each member state chose to distribute them in a different way. Some basing it on their historic emissions, others on their future emissions. This resulted in some plans giving some businesses more permits than they required. They then sold these to make money.

It looks like the EU will continue to make the same mistakes in the second phase of the scheme which operate from 2008. Last week Germany and France indicated that they will actually increase emissions in the second phase.

So what’s the solution?

Clearly doing nothing is not the answer- although it seems to be working in the case of the US. But the current ETS is not performing as it should and could. Last week the IPPR called for the EU to decide the allocation of permits. This is something that member states are unlikely to agree with: allowing the EU to dictate how much aid each industry gets is certainly something they wont like.

The situation is certainly critical. In 2008 the Kyoto mechanism is supposed to come on line, and we’ll start to see project based credits too, which will certainly complicate matters.

The solution is simply to allow all the allocations to be auctioned off. This is the most efficient method, and will result in the CO2 reductions the EU needs to achieve if it is ever to meet the kyoto agreement.

This entry was posted on Sunday, July 2nd, 2006 at 5:00 pm and is filed under Environment, Europe, Technology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.