Global Carbon Trading Takes a Big Step Forward

It has often been pointed out that our modern world could quickly become cleaner, safer, and more sustainable if only externalities, such as air pollution or carbon emissions, were internalized, so that they could be captured and factored into the economic equation. Then, as the argument goes, free market forces would provide the needed behavioral reforms and technological innovations.

Efforts to do this with greenhouse gases, so far, have had mixed results.

The effectiveness of these market-driven programs depends largely on the actual price of carbon, which at present is very low, because of the fact that there is no uniform global carbon trading system, only a patchwork of individual countries. This creates fairness problems when countries that have regulations do business with countries that don't. This so-called carbon leakage will always occur to some extent until there is a truly global carbon emissions agreement.

That is why the announcement last week, that Australia was going to link up their emissions trading system with the EU's emissions trading system (ETS), is so important. It represents a major step towards the establishment of a global system. With international climate negotiations now occurring in Bangkok, talks are reportedly underway with California, South Korea, and Switzerland to form a similar agreement.

The European Union’s ETS, which began in 2005, is the biggest program by far, operating in 30 countries and covering power stations, oil refineries, iron and steel works, cement plants and more. It is a cap and trade plan which puts a limit on the total amount of GHG emissions (the cap), and then divides that amount into shares (known as allowances) which can be bought, sold or traded. If a company does not have enough allowances to cover their emissions, they must purchase more allowances from others or pay a substantial fine. Companies with lower emissions can sell their allowances or trade them on the open market. The number of allowances is reduced each year. According to this scheme, EU emissions in 2020 will be 21 percent lower than 2005.

Now, if only China would get involved. Well, it turns out there is good news on that front, too.

China is currently researching a national carbon trading scheme, and is investigating the possibility of linking up with the EU's ETS scheme as well. Being a newcomer in this area, China faces several challenges of implementation including low public awareness and market maturity.

"Our priority is getting our work done first, accumulating experience and then taking part in making the rules," said Xie Zhenhua, vice-chairman of the National Development and Reform Commission. Wolfgang Sterk, a policy analyst with the Wuppertal Institute in Germany  said, “If a national system emerges in China, depending on the design and scope, it may become the biggest in the world, and allowances in that system would then give a global price signal.”

Meanwhile, here in the U.S., while everyone else is finally embracing cap and trade, focus has just swung back towards the other main carbon alternative, a direct carbon tax. Interest in this approach was recently boosted by an MIT report that claimed a carbon tax of $20 per ton could bring in a lot of revenue ($1.5 trillion) over the next ten years. That's enough to put a major dent in our budget deficit worries. With the U.S. deficit so prominent on everyone's radar, it is no wonder that this plan is suddenly garnering so much interest.

Right now, the primary mechanism for managing GHG emissions in the U.S. has been through the Clean Air Act, by the EPA, which has faced some legal challenges. Cap and trade, which originated in this country and was successfully implemented as a means to control acid rain pollutants (e.g. SOx, NOx) has not been that effective in reducing GHG emissions.

A voluntary carbon cap and trade system, administered through the Chicago Carbon Exchange has been in place since 2003. The program has had its ups and downs, with activity peaking in early 2008. But with the economic downturn, demand has slowed, creating an oversupply of allowances so that the price has fallen to the point where now the U.S. carbon market is nearly dead. Well, maybe not quite dead, a recent regional auction in the Northeast, raised $47 million, although not all the permits were sold, and the minimal price was as low as $1.93 per ton. Meanwhile, California, where a new program is slated to begin with its first auction in November, is hoping to generate higher prices.

To achieve the kind of revenue predicted in the MIT report, prices would have to go up tenfold. But that will only happen with a global agreement sealing off the leakage. And with the U.S. going against the flow, that might prove difficult.

It’s a confusing mess, but the good news is that the idea of managing carbon through legislative action is finally getting serious consideration around the globe. The U.S. needs to jump in and begin negotiating with the rest of world.  Either system will bring substantial improvement and put our economy on a path towards meaningful market-based reductions. Will this be another case of better being the worst enemy of good enough? Hopefully we can make a choice quickly and move forward decisively.

[Image credit: Vic Sharp: Flickr Creative Commons]

***

RP Siegel, PE, is an inventor, consultant and author. He co-wrote the eco-thriller Vapor Trails, the first in a series covering the human side of various sustainability issues including energy, food, and water in an exciting and entertaining format. Now available on Kindle.

Follow RP Siegel on Twitter.