Thursday, January 24, 2008

Lessons from Europe's Carbon Cutting

The Economist (week of Jan19th) in an article called 'Get the Price Right' cautions America to learn from Europe's early mistakes in trying to constrain carbon emissions.

Europe's main tool for cutting emissions is its Emissions Trading Scheme (ETS) in which firms in the 'dirtiest' industries are issued permits to emit carbon dioxide. Simply enough, if these firms want to emit more, they must buy more permits.

These permits, from the start, were given away free instead of being auctioned. As a result, firms in non-trades sectors (especially energy) have simply passed on the cost of carbon to customers; thus failing to increase the incentive to cut emissions.

Other mistaked compounding the problem result from countries over-estimating emissions outputs and subsequently issuing too many permits. Additionally, large portions of industry were left out of the sceme.

As a result, carbon prices crashed, controls failed, and it appears that most European countries will not meet their Kyoto protocol commitments.

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