The EU’s Emissions Trading Scheme Has Been Voted Down

Summary.  The European Union instituted its Emissions Trading Scheme, using a cap and trade mechanism, in 2005.  Since that time, the Scheme has gone through periods in which the number of allowances was too high, resulting in excessively low values for their price. 

In a vote on April 16, 2013 the European Parliament defeated a proposed measure continuing to allot allowances to the emissions sources among the EU’s member nations, largely for economic reasons.  If allotments are not revived, the ETS will cease operations.  This would terminate one of the first multinational efforts to mitigate greenhouse gas emissions.
 

The ETS exemplifies the administrative and political difficulties facing cap and trade regimes.  Valuing carbon emissions is better achieved with a carbon fee.

 

Introduction.  The original members of the European Union (EU) in 1997 acceded to the Kyoto Protocol, an international treaty to limit emissions of carbon dioxide (CO₂) and other greenhouse gases (GHGs).  The Protocol entered into force in 2005.  Even before this date the now expanded membership of the EU undertook to establish an Emissions Trading Scheme (ETS) to limit GHG emissions through 2020, using a cap and trade market mechanism.  In such regimes allowances, once granted, can be traded or auctioned in an open market; this fixes a monetary value for them.

In the initiation phase of the ETS the EU allowed each member nation independently to establish the number of allowances (each permits release of one metric ton of CO₂).  As a result, too many allowances were granted, and the ETS market wound up valuing the allowances at a very low price, even approaching EUR 0 in one year.  In the second phase (2008-2012) the number of allowances granted was reduced, and the ETS market valued allowances at reasonable levels.  In the third phase, beginning in 2013, the EU began centrally to determine the distribution of allowances.

Unfortunately, the EU cancelled its most recent auction   in March 2013 because bids received were “significantly” below the actual market rate.  In 2013, the start of Phase 3, about 40% of newly issued carbon emission allowances were being sold at auction for the first time.  The rest are still distributed at no charge.  The price had fallen to EUR3.73 (US$4.86) a metric ton early in the year.  The price had been about EUR 25 in 2008.

Longer term the ETS price for emission allowances has fallen drastically, by 90%, in the last five years.  This is due largely to a drop in demand for energy among EU countries because of recessionary conditions.  This has led to an oversupply of allowances.  The ETS began to reevaluate its allocation of allowances, in an attempt to rebalance the trading system and maintain a price on emissions.

Unfortunately the EU has now voted against its cap and trade regime.  The New York Times reported on April 17, 2013 that the European Parliament had voted not to lower the number of carbon dioxide emission allowances to be granted going forward.  The Times called the result “a potential death blow” to the cap and trade emissions regime.  Even so, emissions from the EU had fallen by 10% between 2007 and 2012, at least partly because of weak economic conditions.  The Parliament gave greater weight to the desire to keep energy costs down in view of the economy than to the overarching need for the world to limit its emissions of GHGs.  After the vote, the value of an allowance fell 40% to about EUR 3 per metric ton.  It is estimated that in order to have an effect on curtailing emissions, the price would have to be about EUR 30 per metric ton or higher. 

Analysis

This blog has long advocated in favor of a direct fee on carbon fuel consumption, rather than implementation of a cap and trade regime, to put a price on emissions of GHGs and thereby lower the annual rate of GHG emissions.  This latest development in the EU, the failure of its policymakers to continue the ETS, shows that a cap and trade regime may continually be subject to political interference.

As written in a recent post a cap and trade regime has many disadvantages in comparison to a carbon fee.  Some of these are apparent when considering the EU.  The factors include a) a need to account accurately for baseline emissions from each identified source prior to placing the regime in operation; b) a continued need for monitoring emissions from each source as the regime operates; c) a need for a  mechanism to allot allowances both at the outset and in subsequent periods of operation; d) a mechanism or rule for distributing allowances, including determining whether to grant or sell them; and e) setting up the administrative offices needed to operate the regime.  It is seen from this incomplete list that a cap and trade regime presents many challenges, requires an extensive bureaucratic structure, and includes many opportunities for mistakes to be made, or for influence, that defeat the objective of constraining emissions.

In contrast, a carbon fee is extraordinarily simple in its operating features and is easy to implement.  For example, a low rate could be established at the outset, which would increase annually to a level at which it would have a meaningful effect in reducing energy demand.  Experience has shown (not discussed here) that a carbon fee is easy to apply, has a broad if not universal reach, and achieves its objective according to its magnitude.  It is clear that the simplicity and effectiveness of a carbon fee offers major advantages over use of a cap and trade regime.

Many commentators have urged use of a carbon fee to mitigate emissions. 

 

In summary, the simplest, most direct, and most effective mechanism for reducing dependence on fossil fuels and mitigate emissions of GHGs is to apply a carbon fee.  The time to begin abating humanity’s emissions of CO₂, a major greenhouse gas, is now.  The longer we wait, the more firmly we cement our dependence on fossil fuels, and the more difficult it will be to achieve meaningful mitigation of global warming.

 © 2013 Henry Auer

Review: “Climate Change Policy Failures” by Howard A. Latin

Summary.  This post reviews the new book “Climate Change Policy Failures: Why Conventional Mitigation Approaches Cannot Succeed” by Prof. Howard A. Latin.  Prof. Latin begins by reviewing the past decade or more of legislative activity in the U. S. concerned with abating greenhouse gas (GHG) emissions, finding the drafts to be ineffective (none were enacted into law).  More generally, he characterizes the gradual approach to abatement currently prevalent both nationally and internationally as being “too little, too late”, and being “back-loaded” toward later decades.  This is ineffective because GHGs would continue to accumulate, building up ever higher levels in the atmosphere and worsening the warming of the planet.  Additionally, the book details the failures at the international level to agree on world-wide abatement policies, over more than two decades.

Instead, the book calls for innovative measures to “decarbonize” our energy economy by deploying replacement technologies, starting right away.  Prof. Latin suggests 1) setting up an independent Clean Technology Commission to select promising replacement technologies to pursue; 2) implementing a progressively increasing carbon tax to fund the investments identified by the Commission; 3) imposing economy-wide regulation of fossil fuel use in those industries responsible for most GHG emissions; and 4) requiring public disclosure of GHG emission rates by emission sources.

Prof. Latin has written a compelling book setting forth the reasons for immediate or early action to abate further emissions of GHGs, and has presented a comprehensive plan on how to go about this task.  “Climate Change Policy Failures” is strongly recommended to policymakers, to researchers and commentators, and to the interested public.

(Readers preferring not to delve into details may wish to pass directly to this reviewer’s Assessment, which appears below, following the exposition of the book’s features.)

 Introduction.

Many books have been published on global warming, including policy approaches to combating the worsening warming of the earth by man-made greenhouse gases (GHGs).

Howard A. Latin, Professor of Law at Rutgers University, has written a book on this topic, entitled “Climate Change Policy Failures: Why Conventional Mitigation Approaches Cannot Succeed” (“Policy Failures”; see Note 1).  The book presents a cogent argument on the urgency of embarking on mitigation efforts.  Setting forth this rationale in itself performs a valuable service.  His statement of the problem, while not original with the author, is all too frequently overlooked in reporting on global warming, and justifies the provocative title that Prof. Latin has chosen for his book.

The Case for Urgent Action

Prof. Latin cites several reports from late in the last decade attesting to the warming of the planet.  For example, the U. S. National Aeronautics and Space Administration reported that 2010 tied with 2005 as the hottest year in recorded human history (citing the New York Times), and that long-term warming is scientifically “unarguable” (citing many reports).

Current policy initiatives are characterized as “too little, too late”.

The U. S. has never enacted greenhouse gas legislation.  Policy Failures points out that, most recently, in 2009-2010, neither the Markey-Waxman bill in the House of Representatives, incorporating a watered-down cap-and-trade mechanism, nor the Senate’s Kerry-Lieberman bill, whose provisions resemble those of the Markey-Waxman bill, was enacted into law. [Presumably after this book went to press, however, the Obama administration issued regulations doubling the fuel efficiency of cars and imposing restrictions on emissions from new large electric generating plants.]  

Some regional climate agreements have been reached in the U. S. in recent years.  These include the Northeast states’ Regional Greenhouse Gas Initiative, the first (if modest) cap-and-trade regime enacted in the U. S., and the Western Climate Initiative (WCI) of seven western states and four Canadian provinces.  Unfortunately the book fails to note that WCI actually fell apart shortly after its formation, leaving only California and one Canadian province in a reduction program extending to 2050.  The book further mentions that the European Union (EU) has undertaken to reduce emissions with the same goal as the state of California.

Policy Failures makes the strong, and valid, point that policies such as these suffer “the same climate policy mistakes”, namely, that they are too gradual. Their stated goals are to reduce emissions over a multi-decade interval, mostly using cap-and-trade mechanisms.  Prof. Latin believes this “consensus approach will prove ‘too little, too late’ by deferring crucial GHG reductions too far into the future….[which] would consistently be back-loaded” to later decades (emphasis in original).

“Back-loading” is inappropriate because carbon dioxide (CO₂), the most prevalent GHG, persists in the atmosphere for centuries or longer (citing the Proceedings of the National Academy of Sciences).  Thus GHGs that continue to accumulate during the coming decades under gradual reduction policies irreversibly increase the total atmospheric concentration of GHGs.  “At best”, Policy Failures states, “the consensus emissions-reduction programs will only slow the growth of … atmospheric GHG[s] and related climate change risks to a minimal extent” (emphasis in original).  While this would “create an illusion of climate change mitigation progress”, it would actually “wast[e] irreplaceable time and resources that could [instead be used] to implement more promising…efforts”.

Policy Failures cites an analogy by Prof. John Sterman of the Massachusetts Institute of Technology.  Imagine a bathtub containing atmospheric CO₂.  It continues to fill up higher as long as the faucet delivers more CO₂ than is removed by the drain.  The best we can hope for realistically in the foreseeable future is to stabilize the bathtub at a new, higher, level of CO₂ because emissions are essentially irreversible.  Natural processes that remove CO₂ are inadequate to pull all the added, man-made GHGs out of the atmosphere.  (The technology of carbon capture and storage, which would store excess CO₂ underground, is still in the experimental stage.)

The need for GHG-free replacement-technologies.

Instead of the gradual policies, Prof. Latin argues strongly that the U. S., and other emission-intensive nations of the world, need to “decarbonize” our energy economies, i.e., to develop ways of obtaining energy that eliminate the release of CO₂ and other GHGs into the atmosphere; this must be done “[n]ow, today, not tomorrow”.  Otherwise, under the “back-loaded” consensus approach, the world continues to emit GHGs and accumulate them in the atmosphere, leading to worsening global warming and its attendant climate harms.   In addition, Prof. Latin declares that rapid transition to carbon-free replacement technologies is the only way for developed countries to respond to the aspirations of developing or less affluent countries without continuing to degrade the climate in ways that adversely affect them. 

Economic strategies for reducing GHG emissions.

Cap-and-trade is one system for lowering emissions.  Under it, all major emitting facilities are allotted allowances that license the release of a fixed amount, say 1 ton, of GHGs.  An administrative agency decides allotments for each period.  Ideally the emitters would pay for the allowances, frequently by auction, but at the outset in many regimes these are distributed at no charge.  Markets are set up for trading allowances, thereby establishing a price for emissions.  In addition, inefficient sources can buy offsets from operations that consume GHGs (tree farms, for example).  The market price on carbon deters fossil fuel use and motivates research and deployment of replacement energy sources. 

There are many problems with a cap-and-trade regime that make it difficult to succeed.  Emissions continue to be sanctioned according to allotted allowances.  Large corporate emitters can influence allotments such that they are improperly allocated. A large new bureaucracy is needed to administer it.  The market can wind up not valuing emissions high enough to act as a deterrent to emitting GHGs.  Offsets are difficult to regulate and properly administer. 

A carbon tax or fee can be imposed directly, and the tax or fee used in a variety of ways.  The tax increases the price of the fuel, and of any article of commerce made using the fuel, thereby discouraging use of the fuel.  This provides an incentive to commercialize and deploy replacement energy sources. 

There are many possible ways that a carbon tax can be imposed and the revenue dispensed.  One system, offered by Dr. James Hansen, a respected climate scientist who has consistently warned of the perils of global warming for decades, is his fee-and-dividend plan (see Note 2).  The carbon fee would be collected at the source at which a fossil fuel enters the economy, and its revenue would be distributed to all members of the public in equal shares regardless of usage.  Thus there is an incentive to reduce consumption in order to benefit more from the dividend.  Surprisingly, Policy Failures devotes an inordinately large amount of space to criticizing Dr. Hansen’s fee-and-dividend plan in minute detail (see the Assessment below).

Prof. Latin concludes that neither cap-and-trade nor a free-standing carbon tax regime would successfully reduce fossil fuel use and carbon emissions.

International climate negotiations are stalemated.

Policy Failures reviews international climate negotiations since the creation of the United Nations Framework Convention on Climate Change (UNFCCC) in 1992.  The UNFCCC includes all United Nations members, now numbering 193 nations.  UNFCCC negotiations led to the conclusion of the Kyoto Protocol in 1997, under which developed countries agreed to modest reductions in GHG emissions.  The term of the Protocol expires at the end of 2012.  Developing countries were excluded from its coverage.  The U. S., although it is a developed country, rejected the Protocol and so likewise does not fall under its terms.

In recent years the annual UNFCCC conferences in Copenhagen (2009), Cancun (2010) and Durban (2011) have sought without success to conclude a new agreement to follow the expiration of the Kyoto Protocol.  The main points of contention remain those that led to exclusion of developing countries from being bound by the Kyoto Protocol.

Developing countries argue that historically the developed countries have been responsible for most emissions already produced; their per capita emissions rate is much higher than for developing countries.  The continued economic growth of developing countries, on the other hand, necessarily implies a profound increase in their per capita emissions rate as their growth continues.   They contend that it is the developed countries that should take the initiative in reducing their emissions rates.  In their view fairness requires nothing less.  

Developed countries defend the need to include all nations in climate accords now by noting that widespread recognition of the climate conundrum became prevalent only in recent decades.  They feel that the developing countries, with their rapidly growing populations and economies, cannot realistically expect developed countries, whose populations and economies are more stable, to significantly reduce their living standards in order to grant developing countries more leeway with their emissions.

These fundamental differences persist to the present.  By the time of the Durban conference in 2011, all ambition to conclude a successor to the Kyoto Protocol had been abandoned; the only development was an intention to complete negotiation of a new treaty by 2015, with an expectation that it would then be implemented by 2020.  Prof. Latin reflects the opinion of many of not being sanguine about the success of this endeavor. 

Policy Failures laments that it is hard to see how climate negotiations that have been fruitless for the past decade can reach a meaningful agreement for the coming decades as called for by the Durban plan.

Policy Failures proposes four interacting mechanisms to stabilize GHGs.

Prof. Latin proposes that the only way out of an impasse so fundamental is to devise new policies recognizing both points of view.  Significantly, he states  “[s]uccessful climate change policies must accomplish two demanding goals concurrently: eliminating as much residual GHG pollution as feasible to stabilize …[GHGs]…, and promoting greater economic and social welfare in developing countries that otherwise will continue discharging more GHGs …every year”.  He laments that world leaders continue discussions on gradually lowering the rate of emissions rather than seeking the necessary stabilization of accumulated GHGs by early deployment of decarbonizing replacement technologies. 

Current policies, he feels, will achieve neither of these objectives.  Rather, Policy Failures proposes four program steps, starting in the U. S. 

1. Set up an independent scientific, technological and economics Clean Technology Commission (CTC), as a quasi-governmental body, to assess various replacement technologies and decarbonization methods.  It would identify, support development of, and assist in deploying the most promising replacement technologies, while striving to deflect political and corporate influence.

2. Implement a progressively increasing carbon tax whose revenues will be used to fund the activities of the CTC.  The tax, once assessed at an appropriate economic level, will motivate consumers to reduce their interim use of fossil fuels.  The tax revenue should not be applied to uses not related to renewable energy such as deficit reduction, income redistribution, or a rebate or “dividend”.

3. As a complement to the carbon tax, impose new regulations to reduce fossil fuel use in those sectors of the energy economy most responsible for high GHG emission rates, using federal regulatory authority.  These regulations should be stringent enough to induce those affected to invest in replacement technologies sooner rather than later.  Policy Failures recognizes the serious and difficult political obstacles that these regulations are likely to encounter. 

4. Require public disclosure of all GHG emission rates in the U. S.  Enhanced knowledge of emissions would provide incentives for the public to lower their use of fossil fuels.

Assessment

Prof. Latin has written a cogent, compelling book setting forth the reason for immediate or early action to abate further emissions of GHGs, and has presented a comprehensive plan on how to go about this task in the U. S., if not worldwide. In summary

1. The factor determining the extent of global warming is the cumulative atmospheric concentration of CO₂ and other GHGs, not the annual rate of emissions.  Humanity is ill-advised to seek gradually to reduce the emissions rate over a period of several decades, all the while continuing to accumulate more atmospheric GHGs. 

2. Policy Failures summarizes the inability at the international level to achieve even modest progress on a worldwide accord to address global warming.  It further reviews the failed legislative efforts domestically in the U. S. to regulate GHG emission rates. 

3. Prof. Latin seeks to stabilize the accumulated GHG concentration at as low a level as possible.  Accordingly, he offers a new private-public framework to develop replacement technologies as rapidly as possible and to fund the framework with a comprehensive progressive carbon tax.  This framework abandons the “back-loaded”, gradual approach that is common policy in various settings around the world.

Policy Failures represents an important contribution to the literature on abating GHG emissions.  That said, the book would have benefited from proposals aimed at incorporating developing countries into a program for stabilizing GHG emissions.  This failing is all the more unexpected in view of the detailed presentation of the current status of international climate negotiations.  The developed countries of the world are projected to have essentially constant annual rates of emission of GHGs in coming decades.  Developing countries including China and India, on the other hand, are projected to continue their development by burning ever-larger amounts of fossil fuels and emitting more and more GHGs each year.  Stabilizing the accumulated level of atmospheric GHGs must include these countries.  Proposals for deploying replacement technologies in these countries would have rounded out the book.  Prof. Latin defended himself against a similar concern expressed by a U. N. official, stating “I do not have a realistic, comprehensive political solution today and neither does anyone else.”

The book would also have presented a stronger case for action had it reviewed the relationship between extreme weather events and the warming of the planet.  Recent scientific analyses of past climate and extreme events have clearly demonstrated causative associations between them and global warming. Also, many internet and other sources are available providing data on the large economic damages and significant societal harms inflicted by the severe weather events of recent years.  Reference to these developments would have enhanced the book.

The book is exceptionally well supported by references in the endnotes.  These cite both internet pages as well as printed sources.

A lesser concern is that Policy Failures devotes a seemingly excessive amount of attention to criticizing and rebutting James Hansen’s “fee-and-dividend” proposal.  The book did not consider other carbon tax proposals in such negative detail.  It appears to this reviewer that perceived defects in Dr. Hansen’s proposal could have been discussed more briefly and more objectively.

In summary, Policy Failures is strongly recommended to policymakers dealing with global warming at both the national and international levels, to those dealing with this issue as researchers and commentators, and to the interested public.  Its important contribution is the case made for taking immediate, bold action rather than continuing with conventional, gradual approaches to mitigation.  Its particular proposal for taking action is also useful; it will certainly serve to stimulate discussion, and hopefully, lead to enacted policy.  

 

Notes

1. “Climate Change Policy Failures: Why Conventional Mitigation Approaches Cannot Succeed”, Howard A. Latin, 2012, World Scientific Publishing Co. Pte. Ltd., Singapore.
2. “Storms of my Grandchildren: The Truth about the Coming Climate Catastrophe and our Last Chance to Save Humanity”, James Hansen, 2009, Bloomsbury USA, New York.

© 2012 Henry Auer