[Editors] MIT: European system for cutting CO2 emissions is working well

[Elizabeth Thomson]

For Immediate Release
TUESDAY, JUNE 10, 2008
Contact: Elizabeth A. Thomson, MIT News Office -- Phone: 617-258-5402  
-- Email: thomson at mit.edu

=========================================
MIT: European system for cutting CO2 emissions is working well
--Lessons to be learned for U.S., globe
=========================================

CAMBRIDGE, Mass.--In a bid to control greenhouse gas emissions linked  
to climate change, the European Union has been operating the world's  
first system to limit and to trade carbon dioxide. Despite its hasty  
adoption and somewhat rocky beginning three years ago, the EU “cap- 
and-trade” system has operated well and has had little or no negative  
impact on the overall EU economy, according to an MIT analysis.

The MIT results provide both encouragement and guidance to policy  
makers working to design a carbon dioxide (CO2)-trading scheme for  
the United States and for the world. A key finding may be that  
everything does not have to be perfectly in place to start up similar  
systems.

“This important public policy experiment is not perfect, but it is  
far more than any other nation or set of nations has done to control  
greenhouse-gas emissions-and it works surprisingly well,” said A.  
Denny Ellerman, senior lecturer in the MIT Sloan School of  
Management, who performed the analysis with Paul L. Joskow, the  
Elizabeth and James Killian Professor in the Department of Economics.

The cap-and-trade approach to controlling emissions is not new. For  
years, the United States has operated highly successful cap-and-trade  
systems for emissions of sulfur dioxide and nitrogen oxides. Based on  
a national emissions cap, facilities that emit those pollutants  
receive a limited number of emissions permits, or allowances, for a  
given period. Facilities that emit more than their allowed limit must  
buy allowances from facilities that emit less. Markets for trading  
allowances operate smoothly and facilities have reduced their  
emissions significantly.

Despite such success, setting up a U.S. cap-and-trade system for CO2  
emissions has proved challenging. Carbon emissions are so central to  
energy consumption that the idea of imposing a policy to limit them  
raises serious concerns. Could putting a price on carbon emissions  
lead to serious economic effects? Might the outcome be the equivalent  
of energy rationing? Such questions loom large as Congress debates  
the merits of several climate-change bills containing proposed CO2  
cap-and-trade systems.

To help address those questions and advance the debate, Ellerman and  
Joskow performed an in-depth study of the EU Emissions Trading Scheme  
(ETS) to date.	

Already, the EU ETS is far larger than either of the U.S. programs  
for sulfur dioxide and nitrogen oxides. Further, the EU ETS operates  
internationally. Allowances are traded by facilities in 27  
independent nations that differ widely in per capita income, market  
experience and other features. As a result, “I think the EU ETS has a  
lot to tell us about how a global system might actually work,”  
Ellerman said.

What are some of the lessons to be learned from the European  
experience? First, it shows that the economic effects-in a  
macroeconomic sense-have not been large.

Second, permitting “banking and borrowing” will make a cap-and-trade  
system work more efficiently. Within the EU ETS, facilities can bank  
(save some of this year's allowance for use next year) or borrow (use  
some of next year's allowances now and not have them available next  
year). Many facilities took advantage of the opportunity to trade  
across time. But they always produced the necessary allowances within  
the required time period. Concerns that facilities would postpone  
their obligations indefinitely have proved unwarranted.

A third lesson is that the process of allocating emissions allowances  
is going to be contentious-and yet cap-and-trade is still the most  
politically feasible approach to controlling carbon emissions. In a  
cap-and-trade system, those most affected-the current polluters- 
receive some assets along with the liabilities they are being asked  
to assume.

Finally, the MIT analysis shows that everything does not have to be  
perfectly in place to start up. When the EU ETS began, the overall EU  
cap had not been finally determined, registries for trading emissions  
were not established everywhere, and many available allowances- 
especially from Eastern Europe-could not come onto the market. The  
volatility of prices during the first period reflects those  
imperfections.

“Obviously you're better off having things all settled and worked out  
before it gets started,” said Ellerman. “But that certainly wasn't  
the case in Europe, and yet a transparent and widely accepted price  
for CO2 emission allowances emerged rapidly, as did a functioning  
market and the infrastructure to support it.”

This report was commissioned by the Pew Center for Global Climate  
Change. The more extensive research project on which it is based is  
funded by the Doris Duke Charitable Foundation.

The full report, The European Union's Emissions Trading System in  
Perspective, is available at http://www.pewclimate.org/eu-ets. A  
longer version of this story is at <http://web.mit.edu/mitei/research/ 
spotlights/europe-carbon.html>.

--END-

Written by Nancy Stauffer, MIT Energy Initiative

About MITEI

The MIT Energy Initiative is an Institute-wide initiative designed to  
help transform the global energy system to meet the challenges of the  
future. It includes research, education, campus energy management and  
outreach activities, an interdisciplinary approach that covers all  
areas of energy supply and demand, security and environmental impact.  
For more information, please visit <http://web.mit.edu/mitei/>.