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Make it work
26 Oct 2007
Topics: Emissions trading, ETS, Climate change
For Jonathon Porritt, head of the Sustainable Development Commission (www.sd-commission.org.uk), the UK government's independent watchdog on sustainable development, the need to make emission trading schemes work more effectively is not only desirable, it is essential if the industrialized world is to have any chance of meeting its Kyoto emissions targets.
"There is a huge amount riding on the EU Trading Scheme. It is the only thing out there at the moment of any scale that aims to tackle the impact of climate change - it's massively important. It's also significant, in that the US is watching the scheme very carefully and there are a number of measures being considered at the moment by Congress. My hunch is that, at the next election, both parties will call for a Cap-and-Trade scheme," says Porritt.
Achieving buy-in from the US would be a huge development, given the inertia of the Bush administration in its earlier years in power.
However, it's not necessarily because emission trading schemes (ETS) offer the best solution to reduce carbon levels, but more because they reflect the most realistic chance of getting the world's powers to take climate change seriously, says Porritt.
"The majority of economists agree that, in an ideal world, we'd have carbon taxes levied as far up the value chain as possible at the point where oil, gas and coal enter the economy. The simplicity of this is its overwhelming attraction, as you'll have a few thousand big players paying the tax, which then gets passed on down the value chain, rather than have millions trading in it, as is the case with an ETS.
"However, having a market mechanism such as Cap-and-Trade can be more flexible as governments set the caps and therefore determine the speed at which an ETS kicks in. Also, the realpolitik is such that the US, even as it re-enters the international scene on climate change, would never accept a tax-based system."
All of which means, according to Porritt, that a huge effort must be invested in making ETS work as effectively as possible.
"Phase 1 of the EU ETS has been ineffective because of the mismanagement of national emissions allocations by EU member governments. It hasn't delivered real cuts in carbon emissions. With Phase 2 which is due to begin in 2008, the EU commission has thought about how to make this scheme much more effective. This should result in a much more realistic carbon price, with one or two interesting projections of future carbon prices where we could see them go up to € 40- € 50 a tonne by 2009, a price that will at last make people sit up and take notice. At the moment, the price of carbon is around € 7 a tonne, which is meaningless. The EU doesn't have any other big policy in its kit bag, so it has to make this work."
Find out more about the CARBON MARKET in the latest edition of Business Standards.
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