Friday, May 09, 2008

Lessons from Europe's emissions trading scheme

The Pew Center on Climate Change has released a new report examining what went wrong and what has been going right with the EU emissions trading scheme.

The report finds that the scheme has achieved much of what was intended: establishing a European-wide carbon price; causing businesses to incorporate the price into their decision-making; and creating the infrastructure for a multi-national trading program. As for actually achieving a reduction in emissions - it's been modest but improving.

Some of the key lessons:
  • Good information is critical. You need accurate data on baseline emissions.
  • Suppliers quickly factor the price of emissions allowances into their business decisions under a cap-and-trade program.
  • Price volatility can be reduced by including banking and limited borrowing of emissions allowances.
  • The relationship between permit allocation, permit markets, and the electricity market must be understood and addressed to avoid unintended consequences.
  • The linkage of 28 separate trading programs in the EU scheme provides a valuable prototype for a globally linked carbon market.

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