As Canadian politicians fight over the best policy to wrestle down carbon emissions, the European Union made its decision years ago -- it adopted a "cap-and-trade" system.
A. Denny Ellerman, a lecturer at MIT's Sloan School of Management, told CTV.ca there are lessons for both the United States and Canada.
Cap-and-trade sets a cap on carbon emissions and then allocates a share of them to industry. Companies that are over their allowance can buy from those who are under, creating a price for carbon.
Given Canada's political wrangling over a looming announcement by the Liberal party that it favours a carbon tax, it's worth noting that the EU proposed its Emissions Trading System (ETS) in 2001 partly because various member nations could not agree on a carbon tax.
Taxation measures within the EU must be unanimous, and some countries opposed a carbon tax.
Instituting a cap-and-trade system only required a "qualified majority," he said.
By 2005, the EU carbon market was operating. The original goal was to get the ETS running in its three-year trial period, but not reduce carbon emissions. That EU hoped to cut emissions in the 2008-2012 period covered by the Kyoto Protocol.
But emissions reductions were still achieved, Ellerman wrote in a paper with Paul L. Joskow, an MIT economics professor.
Some people had warned setting a carbon cap would wreck Europe's economy. Ellerman and Joskow found that carbon trading had no effect on the overall economy, or even on carbon-intensive industries like steel and cement.
"The European experience is that it hasn't had the dire effects that had been predicted," Ellerman said, although the long-term effects on investment are still unknown.
Some other lessons learned from Europe:
- Flexibility is good: European companies can "bank" and "borrow" emissions credits.
- Good data is critically important: You need it on a business-by-business basis. The absence of good data in the earlier going made the price of carbon more volatile than it had to be.
- Compromise may be necessary: Some polluters got free credits, but Ellerman argued that offering some carrot with the stick had them buy into the system.
- Not all sectors are covered. As a result, transportation emissions have surged and hinder the EU's ability to meet its Kyoto target.
The EU's system, while centrally administered, gives participating countries significant control over setting emissions caps and distributing allowances, among other things.
Canadian, U.S. context
Canada will have a system of domestic credits-trading under the Conservative government's program announced in April 2007.
No hard cap exists under the Tory plan, but if companies exceed their target, they can get credits to sell or trade. Credits are also being offered to companies that made early progress in cutting emissions.
The Tories are basing their system on emissions intensity, which requires companies in the 17 regulated sectors to use progressively less carbon per unit of production. It has set a target of a 20 per cent cut below 2006 levels by 2020.
To compare, Canada's Kyoto target of a six per cent cut below 1990 levels wouldn't be achieved until 2025, not 2012 as called for in the global treaty.
Some provinces, dissatisfied with the federal approach, are setting off on their own. Ontario and Quebec, the country's two largest provinces, recently announced a plan to set up a cap-and-trade system -- much to the federal government's displeasure.
Quebec also belongs to the Western Climate Initiative (WCI), as do Manitoba and B.C.
Carbon-rich Alberta, which represents 40 per cent of Canada's GHG emissions, isn't taking part in the WCI. It has established its own climate target of a 14 per cent cut below 2005 levels by 2050.
In the U.S., Ellerman said there's lots of talk about cap-and-trade, but little action.
On June 6, a major piece of climate change legislation died in the U.S. Senate. It would have capped carbon emissions and required polluters to buy permits.
Both Sens. Barack Obama and John McCain, the presumptive Democratic and Republican nominees for president, favour the cap-and-trade approach. Ellerman said progress towards such a system will depend on change in the White House.
U.S. President George Bush had said he wouldn't sign the bill even if it did pass.
For a new president, it will depend on how much political capital they want to put into fighting climate change, Ellerman said.
Liberal Leader Stephane Dion has made a big political gamble by signalling he'll bring in a carbon tax if his party takes power. Given the debate in this country, does Ellerman have any feelings about a carbon tax vs. cap-and-trade?
Europe is largely seen as more tax-tolerant than the United States or Canada. But Ellerman noted that taxes on energy have led to protests by British truckers and French fishermen already facing the effects soaring of oil costs.
"In the United States ... taxes are a dirty word," he said.
With cap-and-trade, the price is hidden and the effect is seen as limiting emissions.
"You can say it really doesn't make any difference. But I think that politically, cap-and-trade is a lot more politically acceptable than a tax," Ellerman said.
