Carbon Trading Takes Two Steps Forward and One Back

Tomorrow, Sept. 25, the first U.S. auction of carbon emission permits will take place, with owners of power plants and industrial facilities in six northeastern states participating. Starting at 9 in the morning and running until midnight, it is organized by the 10-state Regional Greenhouse Gas Initiative, the first mandatory interstate carbon trading system in the United States. Meanwhile, seven states and four Canadian provinces participating in the Western Climate Initiative released a plan yesterday to reduce their collective emissions 15 percent by 2020: taking effect in 2012, it would set annual emissions caps and issue allowances to organizations affected--90 percent of those allowances are to be issued free, only 10 percent auctioned.

Carbon trading got off to a rocky start in Europe, with prices gyrating and much too low, initially, to induce any real corrective action by industry. One might suppose, given the aggressive leadership on climate exercised by countries like the UK and Germany, that the European system would have set emissions caps based on their Kyoto commitments and then ratcheted down the caps each year so as to meet Kyoto targets. But that would have been politically unsellable. What Europe actually does is ask each country to volunteer a cap, which is then modified in negotiations between the EU Commission and the member governments. This of course is a recipe for intense lobbying by industry, with predictable results.

The problem is ongoing. Germany announced this week that it would seek to exempt most of its industry from the proposed next step in ETS, which would involve mandatory auction of emissions allowances in the period 2013-20 (currently the European permits are issued free). Chancellor Merkel, sounding remarkably like President Bush seven years ago, said she "could not support the destruction of German jobs through an ill-advised climate policy."

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