This week Morgan Henley explains EU Emissions Trading Scheme and why it might not be the best way to address the carbon emissions problem.

So, we all know that the world is emitting way more CO2 than the we can handle if we want to avoid global warming. This is a problem. A pretty big one at that. One way to look at it, is like if the developed world had basically been at a nonstop party for the past two centuries, using whatever dirty energy it could get it’s hands on and not looking back. They again and again continued to indulge in temptation and became careless about emission reductions. This was a self-destructive path, and they knew they could eventually be doing serious harm, not only to themselves but also to those around them.

It got to point where the world decided they had a problem. Enter the Kyoto Protocol and the beginning of UN Climate Negotiations in 1997. So all of the countries gathered together and despite a giant CO2 hangover, agreed they needed to create some rules about how and when they could continue to emit CO2. One of the old party animals that was the most unhappy with their current behavior, was the EU. They were supposed to be the world’s role model, the big brother that led other countries down the right path. Maybe it was just the pangs of regret that usually follow a big party, but the EU decided they wanted to get their life back together and begin a new path to a cleaner, greener future. To get back into shape, they decided to go with a controversial new CO2 “detox” – emissions trading.

We see the onset of this plan back in 2005, when all 25 EU member states (also Liechtenstein, Iceland, and Norway) decided that they wanted to give emissions trading – or cap and trade – a try. And thus, the European Union’s Emission Trading Scheme was born. Not only would the EU attempt to create a regional emissions trading scheme, the ETS would become the cornerstone of EU climate change policy. The hope for the future. The economic friendly, carbon diet that would make the EU the world leader in climate change prevention.

Now let’s go to 2009, to the UN’s climate change negotiations in Copenhagen. Since this is a global crisis, the climate change negotiations act as kind of a global health retreat where everyone agrees they needed to recommit to a healthy lifestyle (less CO2 emissions). During Copenhagen, there were big hopes of creating a global cap and trade system. Yet none of the major powers agreed to sign on to it and the negotiations collapsed. Apparently, some countries are a little more addicted to their dirty energy than others… So today, only the EU is the trying out emissions trading on a large scale basis.

There are some other places experimenting with carbon trading, including Australia, New Zealand, India, Tokyo, and California. And if you are now thinking, wow- that must be a typo, she meant to say Japan and not Tokyo, but no, I meant to say Tokyo. Since the failure of Copenhagen, outside of the EU only a few countries have dared to try to implement anything on a national level. This also makes the EU a test drive for the rest of the world to see if cap and trade systems can actually work.

So, how exactly do emissions trading work? Basically it’s a fancy, economic-y of way of trying to get companies to cut down on their carbon emissions. So by providing economic incentives for businesses to cut down on their CO2 emissions, they should be encouraged to innovate in cleaner energy technologies and reduce their CO2 emissions.

Imagine the EU ETS like a dinner that’s being hosted by the EU. The EU says everyone can have one glass of wine, and if you have more, you have to pay for it yourself. So the guests (most of the polluting industries in the EU like coal fired plants, gas burning factories, etc), are only allowed one glass of wine (a permit restricting how much CO2 they can emit). If they drink more than one glass of wine (go over their allowed level of CO2), they have to pay for that extra glass of wine (buy carbon credits). But they can only buy more wine from one of the other guests at the party. So, those guests who don’t drink their entire glass of wine (reducing their CO2 emissions level), can sell off the rest of their wine.

But remember how we got into this problem in the first place? The companies in the EU were already drinking too much (emitting too much CO2) and now we invite them to a dinner party and serve them wine. Does that make any sense? Also, it’s important to note that this wine is free to begin with. As in, in the beginning of the EU ETS, the EU issued out these permits for free. And lots of them. So many, that today they are nearly worthless and companies have little incentive to reduce their emissions because the price for the credits is so low. Companies aren’t so keen on reducing their carbon emissions if they can’t make any money off it- who would’ve thought?

You would think the EU would be a better host, but they are so distracted trying to figure out who drank what and who didn’t, that they are forgetting the most important aspect of this- trying to encourage companies to invest in cleaner, renewable energy. Also, by the end of the night, when everyone’s had a few glasses, it get’s really unclear what exactly should be counted. With options like offsetting, companies can invest in developing clean energy in the developing world, and that should make up for the pollution that they are doing back at home. Yet measuring the impact of offsets are nearly impossible and how are we to know if that clean energy project wouldn’t have been developed anyways without the aid of the dirty energy company?

You are probably aware that the EU has actually cut down on it’s CO2 emissions significantly and it could actually meet its target of emission reduction rate of 17% by 2020- but not because of their new carbon emissions trading scheme. Why? Well much of the “partying” (energy intensive heavy industry) has moved to different countries in the past two decades. Let’s take a look at the UK for an example. Between 1990 and 2008, domestic emissions declined by 20%- yay, win for for emissions reduction! But then if we include imports and exports into that equation, then in reality, their carbon footprint rose by 19% because of the substantial increase in the consumption of imported foreign goods- eh, not such a big win. Also, remember how we are in a huge economic downturn? That means factories aren’t producing as much, and therefore not polluting as much.

It would seem that the case against the EU ETS is pretty clear, yet last Tuesday, the EU decided to give emissions trading another shot. The latest regulation stops another set of credits to be issued out (also known as backloading) with the intentions of making the ones that are already out worth more. Let’s go back to the wine analogy. The EU has just told waiter at the dinner not to bring out the next round of wine. Hopefully, since there’s less wine, the guest will start to want those unfinished glasses a little more… So instead of a bunch of new credits being released, they will only be released in 2019/2020 when the EU calculates that the market will be in better shape.

Most of us can agree that we are happy to see the EU sobering up after it’s indulgent past. But why would European industry really stop it’s party boy ways if the EU is throwing them a dinner party?  Allowing companies to continue to use dirty energy, offering false solutions and not looking at the underlying causes, are not the path to recovery. Getting back in shape is not easy and some sacrifices will need to be made. We all know the saying: “no pain, no gain” – right?

References:

http://grist.org/climate-energy/everybody-chill-out-carbon-trading-is-do…

http://www.youtube.com/watch?v=ReOj12UAus4 

http://ec.europa.eu/clima/policies/ets/

http://science.time.com/2013/04/17/if-carbon-markets-cant-work-in-europe…

http://www.youtube.com/watch?v=pA6FSy6EKrM

http://www.rtcc.org/2012/11/21/how-the-un-climate-talks-can-glue-togethe…

http://grist.org/news/effort-to-revive-cap-and-trade-in-europe-fails/

http://www.nytimes.com/2013/12/11/business/energy-environment/european-l…

http://scrap-the-euets.makenoise.org/english/

http://ec.europa.eu/clima/policies/ets/

http://www.greenpeace.org.uk/newsdesk/energy/analysis/eu-2030-climate-go…