GAO Report Skeptical of ETS, Critical of CDM

December 8, 2008 |

Last week the United States Government Accountability Office released its evaluation of Europe's Emissions Trading Scheme, the European Union's cap and trade program designed to control greenhouse gas emissions. The GAO was asked to investigate the effectiveness and outcomes of the ETS in order to inform the ongoing debate on emissions reduction strategies in the United States.

A carbon pricing scheme has two basic purposes: to reduce carbon emissions and to drive private investment in low carbon technologies. However, according to the GAO, the ETS has failed to accomplish either objective in any measurable way:

"According to available information and experts, the ETS phase I established a functioning market for carbon dioxide allowances, but its effects on emissions, the European economy, and technology investment are less certain...By limiting the total number of emission allowances provided to covered entities under the program and enabling these entities to sell or buy allowances, the ETS set a price on carbon emissions. However, in 2006, a release of emissions data revealed that the supply of allowances--the cap--exceeded the demand, and the allowance price collapsed. Overall, the cumulative effect of phase I on emissions is uncertain because of a lack of baseline emissions data. The long-term effects on the economy also are uncertain. One concern about design and implementation was that the economic activities associated with emissions from covered entities would shift from the European Union to countries that do not have binding emission limits--a concept known as leakage. However, leakage does not appear to have occurred, in part because covered entities did not purchase allowances but received them for free. The effect of the ETS on technology investment also is uncertain but was likely minimal, in part because phase I was not long enough to affect such investments."

The most interesting implications of the GAO report have to do with the carbon offsets that most European States are purchasing in order to meet their emissions reduction goals. The Kyoto Protocol included an offset system called the Clean Development Mechanism (CDM). This system allowed the developing countries that signed on to Kyoto to meet emissions targets by investing in low-carbon energy projects in the developing world. This mechanism was put in place to provide Kyoto signatories with a less costly alternative to reducing emissions in the developed world.

The GAO report points out that:

"the CDM has provided flexibility to industrialized countries with emission targets and has involved developing countries in efforts to limit greenhouse gas emissions, but the program's effects on emissions are uncertain, and its effects on sustainable development have been limited."

The report makes three recommendations regarding the CDM:

"(1) that it may be possible to achieve the CDM's sustainable development goals and emissions cuts in developing countries more directly and cost-effectively through a means other than the existing mechanism; (2) that the use of carbon offsets in a cap-and-trade system can undermine the system's integrity, given that it is not possible to ensure that every credit represents a real, measurable, and long-term reduction in emissions; and (3) that while proposed reforms may significantly improve the CDM's effectiveness, carbon offsets involve fundamental tradeoffs and may not be a reliable long-term approach to climate change mitigation."

As the report so succinctly observes, if the goal of the CDM is to drive sustainable development and reduce emissions in the developing world, than there are better, less expensive, and more direct methods to accomplish this goal. And, given that these offsets are inherently dubious in their efficacy, the CDM also undercuts the integrity of the entire ETS.

In other words, Europe is spending more than it needs to on projects in the developing world that might not actually be reducing carbon emissions, undermining the effectiveness of the European cap-and-trade system.

A few months ago we reported on a story that Europe would rely on CDM offsets to meet its reduction targets largely through CDM offsets even as it plans to build new coal plants to meet its still-growing energy needs. It's increasingly clear that carbon pricing and cap and trade are fraught with both shortcomings and missteps. The GAO report confirms that there are simply far more effective and direct ways to drive the deployment of clean and efficient energy technologies - as well as sustainable development in the world's poorer countries - than cap and trade and offsets.