Burton Richter, the author of our text, mentioned that one of the methods of helping to reduce carbon emissions is to figure out some fair and useful way to levy a fee on corporations that contribute significantly to emitting CO2 into the atmosphere.  Specifically, he wrote, “One…way is to see how much it would cost to eliminate the emission from our present coal-based system and include that as a fee paid to the government if you emit the greenhouse gas – no emissions means no fee to be paid….” (Beyond Smoke and Mirrors, pp. 88-89)

Apparently, the European Union is doing just what the author is suggesting and has been doing it since 01 January 2005.  The Financial Times recently published an article entitled “Cheap and dirty” wherein they analyzed the emissions trading scheme (ETS) enacted by the European Union seven years ago.  The scheme grants a permit to corporations to emit one ton of carbon dioxide, for a fee; these permits can be sold to others or saved for future use, depending on the needs of the company.  (The website of the European Commission gives a better explanation of exactly how the scheme works.)  According to the European Commission’s website on the policy, by 2020 emsissions will 21% lower than they were in 2005.  (The website was last updated on 15 Novemeber 2010.)

For instance, Alcoa buys a million permits, which gives them the right to pump a million tons (2 billion pounds) of carbon dioxide into the atmosphere.  Alcoa only needs 100,000 permits, so they decide to sell 400,000 permits to BP and hold on to the other half-million permits for a “rainy day”, as it were.  The rationale behind this scheme was to encourage corporations to figure out other innovative ways to safely manufacture their products without using greenhouse gases or pay an ostensibly prohibitive fee for the “privilege” of doing business as usual.

The ETS is rooted in the Kyoto Protocol and has its genesis in that great bastion of innovation, the United States of America.  “The EU ETS would likely not have come into existence without the Kyoto Protocol, but the story of that relationship contains its share of irony.  Briefly, emissions trading is an American institutional innovation in environmental regulation that was forced into the negotiations on the Kyoto Protocol by the United States in late 1997 in the face of strong opposition from the EU.  Resistance to the concept continued until the new American president pulled the United States out of the Kyoto Protocol in 2001, after which European opposition to emissions trading faded.  Thereafter, the EU ETS became an indispensable instrument of European climate change policy and the primary means by which the EU member states would meet their obligations under the Kyoto Protocol.”  (ftp://ftp.cba.uri.edu/classes/graham/CarbonIFRS/Carbon/carbon%20markets/The_European_Union_Emissions_Trading.pdf)

Now, the EU policy was enacted before the economic downturn and seemed promising at the outset, but things have deteriorated since, according to the FT.  “Proponents hoped that by putting a price on carbon and forcing companies to pay for their emissions, it would prod [the companies] to pour money into green technologies and greater efficiency.  But, as a result of a subsequent recession and poor management, the market is saturated – and could be for years to come – with permits that give companies the right to emit carbon without penalty.  That has led to a prolonged slump in the carbon price.  At roughly $9 per ton, compared with a peak of nearly $40 in July 2008, it is a fraction of what policymakers and analysts had forecast it would have reached by now – and well below the levels necessary to justify the desired investments….It is a mechanism borrowed from the US, which introduced a cap-and-trade approach to contain the industrial pollution fouling lakes and rivers in the 1990s.  The appeal was its seeming simplicity:  all policymakers had to do was place a cap on the bloc’s annual emissions, then stand back and let companies find the most cost-effective way to reduce them.  They could invest in cleaner technology  or opt to buy permits on the secondary market from more efficient rivals.  Companies embraced the idea because they believed it would be less intrusive than other forms of regulation.”

If Alcoa had bought those permits in July 2008, it would have cost the company $40 million, but those same permits today would run about $9 million.  Today, if it costs, say, $15 million dollars in penalties for Alcoa to emit those carbons into the atmosphere without a permit and it costs $25 million to upgrade to a more energy efficient way to greatly reduce or eliminate emissions, then it would make better business sense for Alcoa to simply pay for the right to emit rather than spend the loot on upgrading.  Conversely, in pre-recession July 2008, Alcoa would have had more incentive to invest in upgrading.

The policy is not quite going according to plan and is even ridiculed by business executives within the European Union.  A financial analyst from the Swiss banking giant UBS called ETS “a joke” and went on to say that while the concept is theoretically wholesome, “it’s just when it gets exposed to political reality” when things go awry.  “In an effort to overcome business opposition, the European Commission, the EU’s executive arm, set a generous cap and allowed national governments to lavish favored industries with free permits.  In some sectors, such as electricity, companies subsequently reaped millions of euros in windfall profits by passing on the market price of the permits to customers even when they themselves paid nothing for them….”(Financial Times)

The EU has run smack dab into the “invisible hand” of the capitalist free-market system, which is making it rethink and retool its ETS policy.  For all intents and purposes, their trial and error approach has positioned them on the cutting-edge of global emissions reduction policy, even though the present policy is at a low point.

They are moving forward with bold, but unpopular, applications of their policy.  One of those policies is “to force foreign airlines to pay for the carbon pollution generated by each flight landing at its airports.  [P]olicymakers justified their action as the only way to forge a global solution to one of the fastest-growing sources of greenhouse gas emissions.” (“Cheap and dirty“)  China, Russia, India, and the U.S. is against this policy and are meeting in Moscow this week to discuss it.

Regarding the ETS, the EU is seriously considering driving up the prices of the emissions trading allowances by removing over one billion of the permits.  Such an action would restrict supply and conceivably make the remaining permits more valuable.  China is honing in on what the Europeans are doing so that they can figure out how best to proceed in forging their own emissions control policy.  My guess is that the whole world is watching, as the whole world’s fate is dependent upon lowering the buildup of greenhouse gases into the atmosphere.