It looks like the US is definitely heading towards emission trading. US Congress is preparing to pass a bill that would introduce a cap-and-trade system to abate climate change in the world’s largest emitter of carbon dioxide. The fact that congressmen from states with huge stakes in coal production have supported the bill, looks like a firm indicator that this bill might pass. If it does, Obama will deliver the kind of change that the Climate Change community expected from him. He will have brought his country to adopt a policy that is in line with what most people from other countries consider to be acceptable. Whatever the details of the actual system and its targets, this is indeed changing the world’s approach to climate change. Just consider what an immense difference this is with the previous administration where energy policy was written by representatives of the energy industry.
Mr. Obama might have an unique opportunity to bring about a fundamental change in the American society. So far the US was the only country in the world that didn’t manage to fuel its growth by using its energy more efficiently. In the American mindset energy consumption was expected to grow in a linear fashion to overall economic growth. American cars in 2000 were no more fuel efficient than they were in 1980. On the contrary, Americans started driving around in gas-guzzling military vehicles in city environments! As prices rose to record levels, US citizens have started to understand the irrationality of this behavior. Since 2008, the US has started to consume less oil. And even if prices have fallen recently, the economic crisis supports this evolution towards a more fuel efficient society. The fact that the US car manufacturers have such big problems shows that the US consumers are no longer willing to accept the thrifty fuel-spending behavior their models try to lure them into.
The discussions on the US emission trading policy sound very familiar to me, and make me think of 2003 – 2004 when the details of the EU policy were hammered out:
- By postponing them for a far distant future (beyond presidential terms), it becomes politically possible to commit on ambitious targets. The US will cut its carbon dioxide emission by a hefty 83% … by 2050. For the more near future (2020) the target is less ambitious: -17%.
- For industry this target is too ambitious, for environmentalists it is not ambitious enough. This shows that such figures are what they should always be: a compromise.
The details of US emission trading will become clear in the next months. Policymakers will have the advantage of being able to look at the EU system for lessons learned. They might consider the following:
- Take care of the effect of emission trading on electricity prices. You do not want the electricity consumer to pay the bill for cleaning up the atmosphere. The fact that the proposed bill states that utilities will get 35% of their rights free-of-charge, indicates that US policymakers are concerned about this.
- Beware of design flaws in the system. A big flaw in the EU system is that participants that emit more than the rights that they hold, cannot choose to pay a fine instead of entering (purchased) emission right. If a real shortage in emission rights would occur in the EU system, prices for rights could rise infinitely as participants scramble for rights that are not available. Maybe we will see this happen for the first time in 2012. By giving participants the possibility to pay a fine for those rights that they don’t enter, you would put a cap on this.
- The most difficult part of emission trading scheme design is the allocation process. In Europe this has led to enormous strife between countries and industry sectors. Moreover, the allocation process doesn’t appear to be fair. In many countries, it appears to be so complicated that individual firms can obtain more rights than they should. But is extermely difficult to find the right balance between arbitrary allocation and allocation that takes into account the particular situation of a company. Auctioning the initial rights might be the best way of solving this problem, but it has important economic repercussions.
Talking about these flaws in the EU emission trading system brings me to the last remark. The initiatives of the Obama administration might inspire the modesty EU policymakers need to cure the ills of their system. In the future: they will no longer be able to use the argument ‘at least we are doing something about climate change’, as a response to criticism about the EU system. Let’s hope that the US system works better, so that they are forced to adapt ours.