EU carbon trading system brings windfalls for some, with little benefit to climate
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BRUSSELS: The European Union started with the most high-minded of ecological goals: to create a market that would encourage companies to reduce greenhouse gases by making them pay for each ton emitted into the atmosphere.
Four years later, the carbon trading system has created a multibillion-euro windfall for some of the continent's biggest polluters, with little or no noticeable benefit to the environment so far.
The lessons learned are coming under fresh scrutiny now, both in Europe and abroad. EU leaders will meet Thursday and Friday to work on the next phase of their system, seeking, they say, both to extend its scope and correct its flaws. And in the United States, President-elect Barack Obama has pledged to move quickly on a similar program.
As originally envisioned in Europe, companies would buy most if not all of the permits needed to cover their projected carbon dioxide emissions for a year, one permit good for each metric ton of CO2, the main greenhouse gas. If they produced more gases than expected, they would have to buy more permits; if they came in below target, they would be able to profit by selling their extra permits to companies that were polluting over their limit.
The initiative also included another, quieter goal: to raise the price of electricity by letting utilities pass along permit costs, thereby encouraging energy efficiency and innovation among customers as well.
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But the system that emerged was far from that model.
After heavy lobbying by giant utilities and smokestack industries, who argued their competitiveness could be impaired, the EU all but scrapped the idea of selling permits. It gave them out for free, in such quantities that the market came close to collapsing because of a glut.
But in line with the original strategy, utilities in countries from Spain to Britain to Poland still put a "market value" on their books for the permits and added some of that putative cost to the prices they charged industrial customers for electricity. And they did not stop there. In one particularly contentious case, regulators in Germany accused utilities of charging customers for far more permits than they were entitled to.
Nowhere was this behavior more evident than at RWE, a major German power company, which has acknowledged that it is the biggest carbon dioxide emitter in Europe. Bank analysts and environmental advocates estimate RWE had received a windfall of roughly €5 billion, or $6.5 billion at current exchange rates, in the first three years of the system, concluding in 2007 - more than any other company in Europe.
In a confidential summary of its findings, obtained by the International Herald Tribune, the German cartel office in late 2006 accused RWE of engaging in "abusive pricing," piling on costs for industrial clients that were "completely out of proportion" with its own costs. It called for cuts of up to 75 percent.
RWE settled the case last year while denying any wrongdoing. It says price increases from 2005 to 2007 predominantly reflected higher costs for hard coal and natural gas.
Europe's overall experience with carbon trading has been a sobering one.
Its implementation has been marked by maneuvers and adjustments to the original framework that have yielded significant cost benefits to many of the continent's biggest polluting industries. Meanwhile, the amount of CO2 emitted by plants and factories participating in the system rose 0.4 percent in 2006 and an additional 0.7 percent in 2007.
The United States is now considering a system of its own, with Obama proposing to make industries buy all of their permits. He has said he would devote $150 billion from the sale of those permits over 10 years to energy efficiency and alternative energy projects.
Many of the framers of the European plan, meanwhile, have thought hard about the way the legislation evolved as they prepare to take up the next phase. But they face the prospect of trying to close numerous lucrative loopholes while confronting the same tug of war between lofty environmental goals and their immediate economic costs - a challenge made even more difficult by the onset of recession.
Lofty goals at the outset for curbing CO2 emissionsDuring long negotiations on the landmark Kyoto climate treaty more than a decade ago, the United States, through the administration of Bill Clinton, was the loudest in insisting on including a reference to "emissions trading" in the treaty.
Americans had pioneered such markets in the 1970s and used them on a broader scale during the 1990s to reduce emissions from power plants blamed for acid rain.
U.S. officials argued that markets were the most effective way of encouraging innovative, emission-reducing technologies.
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