The EU ETS has been a relative success considering the challenges it has faced and should serve as an example in the current US climate policy debate, argue Denny Ellerman and Paul Joskow in a May 2008 report for the Pew Center on Global Climate Change.
The authors describe the trial period the ETS went through between 2005-07 and comment on how well the system has performed despite the speed with which it was implemented. Despite the initial setbacks, the authors applaud the way EU member states adopted an accepted, transparent price for CO2 tradable emissions allowances in 2005, created a functional market for these allowances and set up a monitoring and verification procedure.
Ellerman and Joskow claim the ETS can provide the US with some important lessons, including confronting the interaction between allowance markets and allowance allocations, and urge the country to adopt this “public policy experiment”.
The three-year trial period showed that everything “does not need to be perfect in the beginning,” as the objective is to create a system that gives emissions a price and demonstrates the need to tackle these in the long term, claim the authors.
The authors make an important distinction between the classical cap-and-trade model and the ETS – the decentralised nature of the EU version. In the EU, each member state sets its own allowances, reviewed by the Commission according to the Emissions Trading Directive. Highlighting the ETS’s gradual approach during the first period in 2005-07, the second in 2008-12 and the third in 2013-2020, Ellerman and Joskow point to the cap’s annual rate of decline of 1.74%.
The authors say the ETS covers about half of the EU’s CO2 emissions and about 40% of its greenhouse gas emissions as covered by Kyoto. Aviation is to be covered by 2011, with other sectors to be covered by other directives.
Non-compliance with the ETS by member states is dealt with by penalties spelled out in the directive, making this the only EU law to impose financial penalties that must be applied automatically, they add.
Almost all of the countries which joined the EU in 2004 have complained that proposed reductions in the emissions cap are unfair on their economies due to the structural changes they are undergoing – yet they are expected to remain in the system, say the authors.
The preliminary three-year trial period looks set to be completely overhauled if the proposed amendments by the Commission come into effect, according to the authors. The cap would be set centrally, the allowances harmonised by mandatory auctioning for the power sector and national allocation plans would be scrapped. All of this, argue the authors, will test Europe, determining whether it is ready to accept increased centralisation of policies in key sectors.
Ellerman and Joskow believe the “ETS has evolved from being an engaging possibility” to become the “flagship of the European climate change programme”. They see the trial period as a good start for all climate change programmes worldwide.
Hailing the EU’s achievements, the authors conclude that the bloc has “done more with the ETS, despite all its faults, than any other nation or set of nations”.