Re: US policy Was Re: [asa] Subglacial Water System Moving

From: Rich Blinne <>
Date: Thu Feb 22 2007 - 16:40:45 EST

On 2/22/07, David Opderbeck <> wrote:
> But let me throw out some questions for you Rich:
> 1. do you agree that the EU cap and trade program implemented under Kyoto
> has been a failure

I'll just deal with this one because the rest of the questions follow from
this. I am assuming you are referring to the appearance of failure due to
the price crash of credits last Spring. The vintage 2008 forward market
(Kyoto compliance) did not drop as precipitously because of the market's
belief that stricter caps and broader coverage was/is coming. [See] The early experience mirrors the experience of the U.S.
SO2 cap and trade. With the first auction in 1995 the price collapsed below
$100 because there was low hanging fruit in the pipeline. When the U.S.
government remained firm with the Clean Air Interstate Rate with the
deepest cuts to date the spot price rose well over $1500 dollars. Other
fluctuations tracked as innovations hit the market.

The success or failure cannot purely be tracked by the price of the credits.
Does this spur innovation? And even though this market is very young it
appears the answer to this is a yes. A preliminary analysis in December 2006
by the European Commission concluded a verified emissions of participating
installations was 2.0 billion metric tons versus an annual average
allocation of 2.2 billion metric tons. [Jos Delbeke to the 6th IETA Forum on
the State of the Greenhouse Gas Market] At the same time, economic growth
was relatively robust particularly in the Eastern European countries that
you were most concerned about. Dr. Denny Ellerman and Barbara Buchner of MIT
looked at the abatement claimed in 2005 of 200 million metric tons. They
believed that the data was biased high but it was also unlikely that it was
zero, either. They thought a 3% abatement -- about half the amount claimed
by the Europeans -- was a likely number. []

The Europeans clearly modelled their system based on the success of the
Americans. There is one key difference that in my opinion has made it less
successful than it could be and that is how the initial allocations were
determined. The Europeans initially allocated by forecasted rather than
historical emissions that the Americans did. Forecasting is difficult and
you can get price crashes if the forecasts are off like what happened late
last April. At the time the reports came out that the real emissions were
less than forecast and the market reacted accordingly.

Summing up, the 2005-2007 trial was a rocky one. Nevertheless, the early
stages mirror the early stages of the clearly successful U.S. SO2 cap and
trade. If the Europeans hold tough, tighten the targets and broaden the
scope for the NAP II Kyoto compliance phase in 2008-2012 then they might
very well be able to mirror our success.

Note: I went into this analysis generally being as skeptical as you because
of the price crash last Spring. Once I did the research I found that the EU
program was a lot more successful than I had originally thought. To be sure
cap and trade is no panacea but it ain't chopped liver either. It looks like
it could be one of a number of tools of driving a free market to internalize
the externalities of carbon emissions. I still think a carbon tax is better
but I am no longer as sure. Sorry for answering a yes or no question with
verbal diarrhea. :-)

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Received on Thu Feb 22 16:41:22 2007

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