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Denny Ellerman is the author of 'Pricing Carbon'

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EU carbon trading scheme has been 'an enormous success'

Danny Ellerman

9th March, 2010

The European Emissions Trading Scheme was always going to disappoint the NGOs who wanted a perfect climate solution, but simply bashing it ignores the progerss that can be made through small steps

Without reading it, climate campaigner (and author of the influential A Dangerous Obsession report on Carbon Trading) Sarah Jane Clifton from Friends of the Earth commented on the three years' evidence and research that informed Ellerman et al’s analysis of the EU ETS in Pricing Carbon.

'It [the EU Emissions Trading Scheme] is not driving investment in green technology and has actually led to a chill on other methods of reducing emissions. There is an urgent need for direct interventions through regulation and taxation to address the shortcomings of the EU ETS and drive real emissions reductions in Europe.

'If you just look at basic climate science and the time we have left to peak and decline global emissions, setting up and linking up global emissions trading schemes is totally unfeasible.'

These objections by green campaigners (and also euro sceptics) raise the following possible questions:

  • Why did we not know that EU ETS was a success for its first phase? 
  • Were there not estimates? 
  • Did we not have a a vague notion it had worked?

There were people who said it was a success, but it depends on how success is defined and what could be said at various points in time.
 
Obviously, from the standpoint of reducing emissions, there would be no data on which to base an opinion prior to the first release of verified emissions data in April 2006, which was almost half way through the first period.

As an example, a colleague and I analysed this data and produced a working paper in November 2006 presenting the results of our analysis, which concluded that emissions had been reduced. This paper was subsequently submitted for publication in Environmental and Resource Economics, the leading peer-reviewed journal in environmental economics in Europe, and after revision and the addition of a second year’s data, the article was published in October 2008.

In other words, for a long time it was simply too early to say whether emissions had been reduced or to make estimates of by how much.

Nevertheless, there was every reason to believe that emissions were being reduced since the system did result in a carbon price that in the normal course of events would be incorporated into production decisions and lead to some abatement.

Perception of failure

 
The question is really - why the perception of failure? Putting aside the circumstance that assertions that something is broken are always more newsworthy than observations that things are going as expected, several reasons can be cited.

One of the more important explanations would be that more was expected of the system than what it produced, or to be more accurate, than what the political system was willing to accept.

This view often cited the low price, particularly in the latter half of the trial period, as evidence. Here, there is a slight discord between rhetoric and reality.

'Enormous success'


For many who listen to the rhetoric, Europe is boldly blazing a trail that leads to a transformation of energy use and carbon emissions, when in fact the policies adopted, in this case the EU ETS, are rather modest in their initial ambition.

Impatience also plays a role. Things don’t seem to be changing as fast as they should, or as fast as the rhetoric suggests they should be changing.

In my view, what has been achieved is an enormous success, especially from the political standpoint, but we seem to live in an age when muddling through is not enough and the expectation is that bold, decisive, transformational change is both desirable and possible.

I think muddling through will win out, but that is rarely seen as successful. One would think that this would be fully appreciated in the UK, where muddling through became a national virtue in the Battle of Britain, but most of those who experienced it are dead, or nearly so, and a sense of history may be failing the later generations.
 
A variant on this 'not enough' view of the EU ETS is that it was not perfect. Here again there is a bit of naïveté, since all public policy is flawed.

At best, this point of view might argue that yes the system did reduce emissions but that there were so many other problems that it was hardly worth it.

Windfall profits criticism


Windfall profits will probably continue to be mentioned prominently. There were problems of course and most of them have been corrected, as was the purpose of the initial three-year 'trial' or 'pilot' period.

This period was expected to reveal flaws, for which an explicit process was set up from the beginning to remedy them, and which resulted in the amendments of the EU ETS directive that were adopted in December 2008.

I think most of these critics would agree that these amendments constituted an improvement.

As a non-European, I would also observe that there is a tendency to criticise severely internally but to praise externally. I have been struck by a number of European analysts whom I have heard criticise the system internally in Europe - to the point of virtually calling it a failure - only to praise it when asked to talk about it in the US.

Cap-and-trade


Yet another explanation of the 'failure' view is fundamental disagreement about the desirability of using market-based instruments in environmental regulation. I suspect that this is where Friends of the Earth stands. It is not much noted, but the more radical, non-mainstream, environmental NGOs in the US have never accepted the sulphur dioxide cap-and-trade system [designed to reduce pollution from power stations and heavy industry]. 

This objection tends to be morally-based and it shows up with references to 'licenses to pollute'. The preferred alternative is always a command-and-control system of legal mandates, prohibitions, etc.

Serious questions can in turn be raised about the effectiveness of the conventional command-and-control approach, but if one believes that it is possible for regulators to be all-knowing and benevolent, then it is hard to argue against such an approach.
 
So what has the EU ETS achieved? 'Range' estimates are the nature of this business, since it is impossible to measure what emissions would have been without the carbon price. But our estimate of the average annual reduction of emissions in the EU25 due to the EU ETS is equal to about a third of the UK’s total annual GHG emissions (all of them, not just those included in the EU ETS) or equal to the total annual GHG emissions of Bulgaria, Hungary, or Finland.

Danny Ellerman is an economist and author of 'Pricing Carbon'

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