This is long overdue, but here is the final part (3) of the school paper I wrote on the European Union Emission Trading System (EU ETS). It includes criticisms of the system, some lingering questions, and my final thoughts.
CriticismsCritics of the EU ETS focus their attention on the following: 1) Free distribution of permits, 2) Over-allocation of permits, 3) Unbalanced allocation of permits, and 4) Exclusion of certain GHG emitting sectors of the economy.
During phase 1, emissions permits were handed out for free. Critics argue these permits should have been auctioned off by the government (which is what happened in the subsequent phases) rather than handed out for free. These free permits are viewed by some critics as subsidies for polluters.
Other critics point out that offering free of charge rights to polluters distorts investment decisions. The over-allocation of polluting permits during the first phase didn't allow for scarcity in the market, allowing the price of carbon dioxide to reach $0 in 2007, where it stayed until the end of the first phase. If the price of carbon is zero, who is going to invest in new emissions-reducing technologies? Who is going to reduce emissions if they can just pollute for free? No one.
Over-allocation of permits also differed between member nations. This meant that different national firms and sectors faced different reduction costs and efforts. One of the fundamental objectives of the system, competitive neutrality, wasn't being accomplished.
A fourth criticism is that the EU ETS only addresses part of the overall GHG emissions and emitting sources covered by the Kyoto Protocol. The ETS generally only covers those sectors involved in energy and industry, which account for anywhere from 20% to 50% of each member nations’ total carbon dioxide emissions. Those involved in agriculture, households, and transport are generally excluded from the ETS. Tough European taxes and efficiency standards help to make up for certain CO2-emitting sectors being excluded from the system.
Note: The trading scheme was extended to the airline industry in January 2012, though this has been paused for one year given the possibility of a global system for these emissions.
From the EU Climate Action Website:
Each allowance gives the holder the right to emit one tonne of carbon dioxide (CO2), the main greenhouse gas, or the equivalent amount of two more powerful greenhouse gases, nitrous oxide NO2) and perfluorocarbons (PFCs).
Power stations and other fixed installations have a separate emissions cap from aviation because different types of allowances are issued for the two parts of the EU ETS. Allowances issued for fixed installations are general allowances, while the aviation sector has aviation allowances. Airlines can use both types of allowances for compliance purposes, but fixed installations cannot use aviation allowances.
The EU's decision to limit the ETS to include only part of the European greenhouse gas sources is due mostly to the higher administrative, monitoring, and enforcement costs that would be involved.
Some Lingering Questions
How should the EU allocate permits between incumbent emitters and new polluters? Polluters with a history of polluting prefer free permits over permits that are auctioned off, but what about new polluters? How should the EU and its member nations distribute emissions rights to new entrants? Because they do not have an emissions history, the same method used to predict emissions for incumbent polluters (allocation based on historic production), is not an option.
During the first phase, ETS sectors emitted 80 million tons of carbon dioxide less than the overall EU cap. However, was this due to actual abatement, over-allocation of permits, or some combination of the two? If the price of carbon dioxide fell to zero due to the over-allocation of permits, then the cap was set too high, and coming in 80 millions tons below the cap is no real achievement. Once the price of carbon goes up, we'll see some notable abatement.
Another question is/was can industry absorb the higher costs of auctioned permits without significant negative economic impacts? Auctioning of emission rights is superior to any other allocation method at reducing emissions, but industry must absorb these costs. The European Commission understood that this type of legislation must be introduced gradually so as to not be an economic burden and to gain acceptance from the citizens, especially industry. In order to promote the acceptance of emission trading among participants, the European Commission recognized that cost free permit allocation was necessary during the first phase.
Final Thoughts
The initiation and subsequent passing of the EU ETS is rooted in European ideology. The people of Europe are generally okay with giving up personal freedoms and allowing the government to intervene for the common good - much unlike the United States, a country founded on personal liberties. There is also consensus in Europe that climate change is real, humans are to blame, and that we must take action. Combating climate change is seen as an opportunity to Europeans, not as a cost. This has allowed the momentum of the program to be maintained, even during the economic crisis that hit in 2008.
The EU ETS did not, and will not, change things overnight. It must be implemented gradually, as polluters must adapt to and invest in new ways of doing business. It is the first and largest policy of its kind, and Europe is paving the way for other countries such as Australia and Canada, as they experiment with carbon offset programs of their own. The EU ETS has its flaws, and it's easy to sit back and criticize it, but it is pretty clear now that the program will reach its targets by the end of this decade and can be labeled a success.
I hope you enjoyed reading my school paper on the European Union Emission Trading System (EU ETS) and I hope you learned something new.