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No Reason to Follow the E.U.'s Climate Path:

Today's Wall Street Journal has an interesting op-ed (subscribers only) on Europe's climate change policies, their results, and how their emissions compare with those in the U.S.:

the numbers show that if America is the Great Carbon Satan, Europe is certainly no angel.

Since 2000, emissions of CO2 have been growing more rapidly in Europe, with all its capping and yapping, than in the U.S., where there has been minimal government intervention so far. As of 2005, we're talking about a 3.8% rise in the EU-15 versus a 2.5% increase in the U.S., according to statistics from the United Nations.

What's more, preliminary data indicate that America's CO2 output fell by 1.3% from 2005 to 2006. If these numbers hold up, it would mean U.S. emissions growth is nearly flat so far this decade. Europe hasn't yet released figures for last year, but it did report in June that emissions from the participants in its carbon-trading scheme, which account for almost half of Europe's CO2 production, rose slightly in 2006.

The news gets worse for Europe when you consider that during this decade, the U.S. population has grown at roughly double the rate of the EU-15 while the American economy has been expanding about 40% faster. It seems Europe is becoming less efficient in its carbon production while U.S. efficiency is improving.

The author, WSJ Europe editorial writer Kyle Wingfield, makes clear that this is no reason for Europe to adopt the U.S. (lack of) climate policies, but it should give American policymakers pause before following the E.U.'s lead. He further explains how the E.U. carbon-trading scheme has failed to deliver.
As a measure of the gap between Europe's rhetoric and its reality, nothing beats its emissions trading scheme. The idea is that CO2-intensive companies -- chiefly those that produce power or use a great deal of it -- receive a certain number of permits to emit the gas. If they reduce their emissions and end up with a surplus, they can sell the extra permits to firms needing more allowances. In this way, market mechanisms are supposed to punish or reward companies for their carbon output, encouraging them to reduce it in the long run.

In Europe, however, the "market" consists of demand that government has created artificially and -- more important -- supply that the state distributes arbitrarily. Not surprisingly, companies lobbied hard to ensure favorable allocations when trading began in 2005. The number of permits exceeded actual emissions and prices plummeted. Today, allowances for 1,000 tons of CO2 are priced at about 11 euro cents, hardly high enough to prod a company to cut its carbon instead of just buying more permits. If you think the U.S. Congress -- whether led by Democrats or Republicans -- would be more likely to shun special interests in the name of environmentalism, then I've got some tariff-free Brazilian ethanol to sell you.

Emission trading schemes sound great in theory, but they can be very difficult to implement effectively. Among other things, the credit allocation scheme is particularly vulnerable to rent-seeking, as the E.U. experience shows. For this reason, I would prefer a revenue-neutral carbon tax (offset by reductions in other taxes) over a cap-and-trade scheme. (For more of my thoughts on this, see here.)

Carbon emission credit allocation across the pond has been a particularly thorny problem given the entrance of additional countries into the E.U. As Julian Morris noted in another WSJ op-ed from last week, several eastern European nations are challenging the E.U.'s credit allocations arguing that they are being penalized for other European nations' failure to abide by their Kyoto commitments.

Under the Kyoto Protocol, the 27 EU nations must collectively cut greenhouse gas emissions 8% below 1990 levels by 2012. When the protocol was signed in 1997, the European Union had only 15 member states, each of which accepted a specific commitment to reduce emissions. Since then, however, only two of the original EU countries have lived up to their pledge: the U.K., which switched from coal to gas-fired power stations (though the high price of gas has led to a substantial switchback in recent years), and Sweden, which is increasingly postindustrial.

Lithuania, Latvia, Estonia, Poland, Hungary, Slovakia and the Czech Republic -- the seven countries that are challenging the EU's allocation decisions -- accepted partial responsibility for the EU's Kyoto commitment when they joined the EU. Their emissions fell substantially in the early 1990s following the collapse of communism, as they replaced an aging power infrastructure and closed down inefficient industries. They therefore had reason to believe that Kyoto might be actually a good business opportunity, allowing them to sell surplus emission permits to other EU countries.

But rapid economic growth in these former communist countries also fueled their greenhouse gas emissions -- though they are still well below their 1990 levels. When the Commission cut their emission allocations far below the levels those governments had originally expected, it meant fewer permits for the new member countries to sell. This, in turn, is set to drive up the price of each permit, making everyone else in the EU pay more for their emissions.

Like me, Julian Morris thinks that some form of carbon tax, combined with investment in adaptation, makes more sense than a global cap-and-trade scheme.
A more cost-efficient and effective alternative to stem global warming would be to invest in new technologies that could cut greenhouse gas emissions in the future. One way to incentivize such investments is to impose a small but rising tax on carbon. Environmental economist Ross McKitrick has suggested a carbon tax that would be tied to the mean temperature of the tropical troposphere (a region of the atmosphere that is believed to be particularly susceptible to greenhouse gas-induced warming). If the temperature rises, the tax should rise; if it falls the tax should fall. This is an intuitively appealing idea, since a higher tax would probably spur more rapid developments of low-carbon technologies, countering further carbon-related increases in temperature.

Such a tax would also, among other things, motivate private-sector investments in climate forecasting, since companies would want to know what the tax level was likely to be in coming years. This would introduce long-needed competition and progress in a field currently dominated by government funding.

In the short term, though, the main response to climate change must be adaptation. That is because most of the problems associated with climate change are extensions of problems that we already face today -- from malaria and water-borne diseases to flooding and crop failure. If we could tackle those problems now, reducing their severity, incidence and consequences, then they would be also less of a problem in the future, with or without climate change.

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