Carbon trading, done poorly

The Washington Post reports with its usual diligence on how a carbon-trading market might be set up badly. Give out too many credits, allow participating jurisdictions exemptions for all their private special cases, and include industries whose operations are very easily moved offshore. But that’s Europe for you.

[B]ecause of lobbying by well-connected companies, the E.U.’s limits on emissions ended up being higher than the actual emissions. As a result, fewer companies than expected had to buy emissions this year, and the price of carbon allowances, which had topped $30 per ton of carbon about a year ago, crashed to about $1 a ton. That eased some of the pressure on electricity rates, but prices for next year, after tighter E.U. limits take effect, are still about $20 a ton.

The E.U. is drawing up new rules for a second phase of its program, due to run from 2008 to 2012, but those, too, have sparked controversy.

Fights have erupted as countries seek to guard their interests. Eastern European nations have lobbied for more generous allocations because of their communist legacies and lower living standards. Germany, the continent’s largest wind-energy producer, wants an E.U. mandate that each country get 20 percent of its energy from renewable resources by 2020; Poland, which uses no renewable resources, is resisting.

Germany boasts that it has cut emissions to 18.4 percent below 1990 levels, the benchmark used in the Kyoto Protocol and in Europe. But nearly half the reduction was because of sagging industrial output in the former East Germany after reunification. For the 2008-2012 period, E.U. officials sliced 5 percent off Germany’s emissions proposal.

Of course there will be rocky beginnings, since they’re trying something entirely new. And pain, for operations that can’t or won’t become more efficient. But it’s definitely important to learn from the EU’s experience and its mistakes, to try to create trading systems that offer incentives and rewards to people for doing the right things.

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