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

From: David Opderbeck <>
Date: Thu Feb 22 2007 - 17:34:07 EST

The price crash is one problem, but that doesn't bother me, since I
generally think markets correct that sort of thing over time. The bigger
problem with the EU system is that the supply side is decentralized, which
allows individual member states and their constituent industries to game the
system. In the EU system, a central authority designates the industrial
sectors that will be subject to the trading scheme, but each member state is
free to allocate allowances from a national allowance budget to affected
industries within their borders. As a result (a) supply doesn't respond
efficiently to demand; and (b) strong local industries can capture the
national allocation process. (For a good summary of the EU experience, see

This centralized demand / decentralized supply aspect of the EU system makes
it very different than most of the cap and trade programs tried in the U.S.
The U.S. experiments have been ones in which the same central authority
identifies target industries and allocates the tradeable credits,
establishing a more unified and efficient market. My understanding is that,
while some of the U.S. experiments have succeeded in reducing target
emissions, Phase I of the EU program under Kyoto has seen no net reductions
in CO2 emissions.

A full-on implementation of Kyoto would make the EU decentralization problem
look like child's play -- unless there were a central authority of
sufficient strength to regulate both demand and supply of credits. I think
the prospect of ceding national sovereignty to such a central authority is
the heart of the issue concerning Kyoto or a Kyoto-like regime. If you want
to propose a global cap and trade program, you have to be able to answer
this question of sovereignty. IMHO, it's awfully difficult to argue that
the precautionary principle as applied to the current science on global
warming justifies devolving sovereignty to an unelected international body
comprised of countries like China, Russia, and France.

On 2/22/07, Rich Blinne <> wrote:
> 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 17:34:51 2007

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