Should the EU link its Emission Trading System (ETS) to a similar system the United States may well soon set up? Economically feasible but politically sensitive, was the consensus of experts, at a seminar in Washington, on 17 November, hosted by the Center for Strategic and International Studies (CSIS). The potential problem: if the US introduces a ‘cap and trade’ system, the cap there will most likely be less stringent that in the EU. The consequence: capital will tend to flow from the EU to the US as more European firms exceed their emission allowance and need to buy extra permits.

“The costs will be significantly higher for the EU because the caps there are more stringent,” said Kjell Kristiansen, director of Point Carbon, a consulting firm that gives carbon price forecasts and analyses. With most purchasing of permits being done on the EU side, “the US will get more stimulus, green jobs and technology,” said Kristiansen. He added that a linked-up EU-US market would cause carbon prices to equalise and stabilise, create a more efficient market and lower compliance costs. The EU has its ETS in place since 2005, while the US Congress is only now considering a country-wide ‘cap and trade’, with Democrats hoping to pass legislation by early 2010. Though the US cap is not known yet, it would almost certainly be lower than the EU’s. While the EU aims to reduce its emissions to at least 20% below 1990 levels by 2020, the US’ expected target - presuming a bill passes and that is far from certain - is in the range of 3-6% below 1990 levels by 2020.

Barbara Buchner, energy and environment analyst at the International Energy Agency (IEA), highlighted two other potential sticking points: some lawmakers on Capitol Hill are considering imposing a floor and ceiling on carbon prices, something the EU, with its free-floating market, opposes. In addition, the US is considering setting up a controversial system of offsets for agriculture and forestry, under which farmers would get credits for using tilling techniques that keep carbon dioxide trapped in the soil. The big question that then arises with an EU-US market is whether EU companies could buy those credits to cover excess emissions, effectively subsidising US farmers.

The IEA’s Buchner predicted that in practice “the EU will first wait to see a US system that is working. Then, as a second step, they could be linked”. The US ‘cap and trade’ bill authorises such a linkage so there would be no legal impediment. Point Carbon’s Kristiansen thought it very likely Canada would also be linked in. Several individual US states and Canadian provinces are already working together to create regional ‘cap and trade’ schemes: WCI on the West Coast, RGGI on the East. As for developing countries, which currently receive subsidies for clean energy projects from developed nations, despite having no cap on emissions, Kristiansen said country-wide caps were unlikely to be imposed in the near future, although sector-specific ones might be.

EU ETS HAS REDUCED EMISSIONS

Buchner gave a positive assessment of the EU ETS in the 2005-2007 pilot phase, saying it had led to an emissions reduction of about 210 million tonnes of carbon dioxide equivalent, according to an IEA analysis. She said most of the abatement happened in the EU15, was concentrated in the electricity and industrial sectors, and was often caused by switching fuels - for example from coal to gas. Buchner said the ETS should be used for expensive things, like carbon capture and storage (CCS), rather than for energy efficiency projects, which are less expensive. Graeme Martin, a manager at Shell Energy North America, said “the EU has done a fantastic job” in setting up “a very robust” carbon market. He recommended avoiding a price ceiling and floor “to allow as much normal market behaviour as possible”.n

“The US will get more stimulus, green jobs and technology”