Friday, June 27, 2008

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A recent MIT study suggests my generally negative image of the European scheme may be out of date.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


Steve Withers said...

It is interesting to contemplate that mandating emissions reductions to a schedule and NOT operating a market would actually be cheaper, though the risk of getting the schedule of mandated reductions wrong would be higher. But the same thing can happen in a market situation. We may find that industries dominates by monpolies or controlled by oligopolies will be able to extract the monopoly rents to pay for carbon credits while genuinely competitive industries on lower margins will miss out....and consumers face the consequences.

Markets can be very much more "unfair" and contrary to the wider interest than carefully considered and adjustable schedule of regulated emissions reductions.

Note that either system fails when corrupt practices undermine it.

Anonymous said...

No mention of the tribocide in Zimbabwe on your blog. Turning a blind eye eh.