First a screwy system and then more hands on central planning to make it work

U.S. watches as EU struggles with ‘cap-and-trade’

Move to bolster carbon permit prices

Scrambling to save the continent's effort to cap carbon emissions, European Union lawmakers approved this week a plan to bolster the price of carbon permits, which had fallen so low in recent weeks that some warned it could undermine the system.

The EU plan represents the globe's most ambitious government-run "cap-and-trade" trade program to try to reduce carbon emissions as a strategy to limit climate change. Early in his first term, President Obama eyed such a system for U.S. companies, but the idea was dropped in the face of strong opposition from Republicans in Congress.

The idea of the program is to set an overall ceiling on carbon emissions for the bloc as a whole and to let individual companies buy and sell government-issued permits for how much carbon their plants can produce. Theoretically, the market thus created would reward more efficient, cleaner producers and put pressure on dirtier companies to clean up, but U.S. critics have derided the idea as a "cap-and-tax" plan.

The European Parliament's 344-311 vote on Wednesday will delay the sale of 900 million carbon permits to polluters in order to boost prices, which had fallen to an all-time low in April owing to what analysts said was a gross initial oversupply of permits.

The plan, an amended version of a proposal rejected in April, will return the back-loaded permits to the carbon market next year when, officials hope, the EU's economy will have recovered and demand will be stronger. Prices for carbon permits jumped 7 percent Wednesday to about $6 per ton.

The legislation still must be approved by representatives of national governments and EU ministers.

Experts on both sides of the debate are closely watching the EU experience.

"In theory, it shouldn't matter when they introduce these allowances. Delaying it shouldn't have an effect on price," said environmental analyst and economist Dallas Burtraw. "But investors seem to be taking this action as a signal of the European Union's commitment to support the carbon market, and that has helped to drive up prices."

Mr. Burtraw, a senior fellow at research nonprofit Resources for the Future, said in addition to the two recessions since 2008, European policies, such as those that pushed for renewable energy, also reduced demand for carbon emissions. As a result, prices for the cap-and-trade market dropped drastically, undermining the market incentives of the plan.

The Emissions Trading Scheme (ETS) was launched in 2005 to curb greenhouse gas emissions from approximately half of Europe's key industries. It placed a hard cap on the total emissions allowed and distributed pollution permits to companies. The ability to trade permits as the cap was gradually lowered was supposed to provide the incentive for power plants and factories to cut down on pollution.

Flawed in concept?

Climate and energy policy specialist Lee Lane said the troubled debut of the ETS should be a cautionary tale for U.S. supporters of the concept, calling the EU plan "deeply flawed."

"The fact that the Europeans are in the process of changing their own numerical targets suggests that [the cap-and-trade system] may not be a very realistic approach to the problem," said Mr. Lane, a visiting fellow at the Hudson Institute.

Mr. Lane said that because there is no global agreement on greenhouse gas emissions restrictions, the ETS will not make a significant impact in cutting global emissions.

"Europe simply cannot affect global emissions that much, acting unilaterally as they are doing. And this is frankly the same lesson that President Obama ought to learn with his new proposals for restricting greenhouse gas emissions: [Europe] is having such a deep recession in part because they are overregulated in the first place."

But the EU adjustment doesn't mean the cap-and-trade system is failing, said Nathaniel Keohane from the Environmental Defense Fund.

"That's just telling us there's room to tighten the cap [and] improve the system," said Mr. Keohane, who serves as the vice president for EDF's International Climate program. "We've got to keep our eye on the bigger picture. In the long run, the way we need to be judging the performance of the European trading system is whether it's reducing emissions, and I think [it's] clear that carbon emission under the cap is down by more than 10 percent and the EU has in place a law that's going to keep that cap declining past 2020."

Mr. Keohane pointed to examples in the U.S. of similar successful cap-and-trade-like systems: the leaded gasoline phaseout in the 1980s under President Reagan; the sulfur dioxide (SO2) emission trading program for power plants in the 1990s; and the phaseout of CFCs under the Montreal Protocol during the George H.W. Bush administration.

In the past few years several countries and regions, including Australia, South Korea, New Zealand, Quebec, California and several Chinese provinces, have implemented or proposed cap-and-trade systems, following in the EU's footsteps.

"A lot of countries have been learning from the European system. ... It's been evolving," said Blaise Sheridan, a policy associate at the Environmental and Energy Study Institute, who called the recent problems of the ETS a "market correction."

Along with California, several states in the Northeast have implemented a cap-and-trade system, although there hasn't been a discussion about a national cap-and-trade system since it failed to pass the Senate back in April 2010.

Jeff Kueter, president of the George C. Marshall Institute, said it is unsurprising that European lawmakers are being forced to take "such extraordinary steps" to save the ETS.

"The carbon market isn't a market at all. It's a political tool, designed to further a political end," Mr. Kueter said. "The fact they continue to have to intervene to keep carbon prices from rising should be a warning."