European ETS Reconsidered

A recent MIT study suggests my generally negative image of the European scheme may be out of date.

Read the whole article but they cite several lessons from the European experience.

First, the European experience shows that the economic effects—in a macro economic sense—have not been large. ... A second lesson is that permitting "banking and borrowing" will make a cap-and-trade system work more efficiently. ... A third lesson is the importance of having accurate data and good communications both to ensure a smooth-running market and to achieve the desired reduction in emissions. ... A fourth lesson is that the process of allocating emissions allowances is going to be contentious—and yet cap-and-trade is still the most politically feasible approach to controlling carbon emissions. ...

Perhaps the main message for policy makers is that everything does not have to be perfectly in place to start up. When the EU ETS began, the overall EU cap had not been finally determined, registries for trading emissions were not established everywhere, and many available allowances—especially from Eastern Europe—could not come onto the market. The volatility of prices during the first period reflects those imperfections. "Obviously you're better off having things all settled and worked out before it gets started," said Ellerman. "But that certainly wasn't the case in Europe, and yet a transparent and widely accepted price for CO2 emission allowances emerged rapidly, as did a functioning market and the infrastructure to support it."