August 14, 2008
NY Times Reports Failure of Cap & Trade
The New York Times ran a landmark article today, "Money and Lobbyists Hurt European Efforts to Curb Gases," about the failure of cap and trade in Europe. It should be required reading for anyone concerned about climate change policy in the United States and abroad. It opens with this:
The European Union started with a high-minded ecological goal: encouraging companies to cut their greenhouse gases by making them pay for each ton of carbon dioxide they emitted into the atmosphere.
But that plan unleashed a lobbying free-for-all that led politicians to dole out favors to various industries, undermining the environmental goals. Four years later, it is becoming clear that system has so far produced little noticeable benefit to the climate -- but generated a multibillion-dollar windfall for some of the Continent's biggest polluters.
As President-elect Barack Obama considers how to curb the gases that contribute to global warming, Europe's struggle with the problem illustrates the momentous task ahead for the United States.
The piece comes after the GAO just released a highly critical study of the use of offsets in Europe's Emissions Trading Scheme and amidst the chaotic climate negotiations at Poznan, where several European nations are balking at strict emissions caps. It also comes only a few weeks after President-elect Barack Obama pledged his support for cap and trade at a major climate conference in California.
The article illustrates many of the problems with cap and trade the Breakthrough Institute has highlighted for years (see "Fast, Clean, & Cheap" and "Scrap Kyoto"). In particular, it demonstrates the enormous challenges policymakers face in attempting to raise energy prices for industry and consumers, as well as the corruption and unintended consequences that could plague a similar policy system here in the United States:
The initial idea of charging for many of the permits never got off the ground. Many politicians feared that burdening European industries with extra costs would undercut their ability to compete in a global marketplace. In the end, the decision was made to hand out virtually all the permits free.
With European Union oversight, individual countries were charged with setting emissions levels and distributing the permits within their borders, often to companies with strong political connections.
Jurgen Trittin, a former Green Party leader who was the German minister of environment from 1998 to 2005, recalled being lobbied by executives from power companies, and by politicians from the former East Germany seeking special treatment for lignite, a highly polluting soft brown coal common around central Europe.
The framework of the European system put governments in the position of behaving like "a grandfather with a large family deciding what to give his favorite grandchildren for Christmas," Mr. Trittin said in an interview.
According to the article, German industries ended up profiting from the system instead of paying for their pollution. But instead of passing their profits on to consumers by lowering energy prices, the industries raised prices:
The benefits won by German industry were substantial. Under the plan that the European Union originally approved for Germany, electricity companies were supposed to receive 3 percent fewer permits than they needed to cover their total emissions between 2005 and 2007, which would have forced them to cut emissions.
Instead, the companies got 3 percent more than needed, according to the German Emissions Trading Authority, the regulatory agency, a windfall worth about $374 billion at the peak of the market. German lawmakers also approved exemptions and bonuses that could be combined in dozens of ways and allowed companies to gain additional permits...
After the system kicked off, in 2005, power consumers in Germany started to see their electrical bills increase by 5 percent a year. RWE, the power company, received 30 percent ofall the permits given out, more than any other company in Germany.
The company said its price increases from 2005 to 2007 predominantly reflected higher costs of coal and natural gas. But the company acknowledged charging its customers for the emission permits, saying
that while it may have received them free from the government, they still had value in the marketplace.
The German antitrust authority later investigated. In a confidential document sent to RWE lawyers in December 2006, that agency accused RWE of "abusive pricing," piling on costs for industrial clients that were "completely out of proportion" to the company's economic burden, according to the document, which was obtained by The New York Times.
Whether U.S. cap and trade legislation is dead remains to be seen. What is certain is that it will be delayed indefinitely, as one of Obama's closest allies in the Senate said this Tuesday. But action on energy and climate cannot be delayed any longer. It is imperative that Obama and the new Congress embrace an alternative strategy -- investing at least $50 billion per year in the development and deployment of low-carbon energy technology to transform our energy systems and make clean energy cheap. It's possible this funding could come from cap and auction at some point in the future, but we can't wait by holding these investments hostage to cap and trade. If the funds needs to come from deficit spending, so be it -- as I wrote last week in the San Francisco Chronicle, now is a historic opportunity to borrow and spend on favorable conditions.
Obama is on the right track. In October, he told Time Magazine that an "Apollo project" in clean energy would be his top priority as president. Since then, he has repeatedly announced that major investments in clean energy technology will be part of his historically large economic stimulus package. We have to ensure that this is the case and that a "green stimulus" isn't limited to energy efficiency, as I wrote yesterday. It's easy to get excited about all these developments (or frustrated, especially when it comes to the international negotiations), but let's not miss this historic opportunity to get the investments we need.