Europe takes key step to fight global warming

Dec 12, 2002 01:00 AM

European Union environment ministers agreed to create the world's first international greenhouse gas emissions trading system, a key part of efforts to fight global warming.

Emissions trading may sound vague. But it is likely to materialize as the leading force behind the reduction of carbon dioxide (CO2) and other greenhouse gases, which are thought by many to be the main cause of global warming.
With its expected adoption of the trading plan, the European Union has become the catalyst behind the implementation of the Kyoto Protocol. The global treaty has been approved by more than 160 countries and requires most industrial nations to cut their greenhouse gases by 6 % below 1990 levels -- a goal that would likely remain elusive without some type of free market exchange, which Europe anticipates to be fully functioning by 2005 and which some analysts say could become an $ 8 bn market by 2007.

Under such a system, a cap is placed on carbon dioxide emissions. Businesses that discharge less can sell, bank or transfer those "credits." Companies that are pushing the limit can either take steps to cut their pollution by implementing new technologies, by switching to a cleaner-burning fuel, or by buying "credits" from another business. As the ceiling on emissions is gradually lowered, pollution levels drop. Countries could buy and sell those credits among each other.
"The quota system will allow enterprises in Europe to reduce emissions in the most cost effective manner," says Danish Environment Minister Hans Christian Schmidt, whose country now holds the rotating presidency of the EU. "It is good for the environment. It is good for enterprises and it is good for the economy." While a few stumbling blocks remain, the EU's Parliament is likely to approve this agreement when it meets in January.

As governments internationally continue to restrict pollution levels, emissions-trading exchanges are expected to sprout and play a role in environmental policy. The thinking is that by trading credits,a "price" for emission levels is established that will send the proper investment signals to those who have to decide how they will reduce harmful pollutants. Installing environmental controls may or may not be cheaper than buying emissions credits.
Despite the fact that President Bush does not endorse the Kyoto Protocol, about 40 US companies are creating a pilot market for CO2 emissions to be traded at the so-called Chicago Climate Exchange that is to begin operations in 2003. Meanwhile, eight mega companies that include Dupont, Entergy and Shell are establishing a trading system among each other and have vowed to cut their CO2 emissions by 80 mm tons no later than 2010. Altogether, the World Bank predicts that the market for all greenhouse gases will be worth $ 10 bn by 2005.

To comply with Kyoto, the EU is required to cut its combined emissions of carbon dioxide and five other greenhouse gases to an average of 8 % below 1990 levels in the years 2008-2012. That's greater than the 6 % average reductions that others must pursue -- a goal that will be achieved through a "burden-sharing" agreement among the 15 EU members that imposes legally binding limits on how much each country can emit within this overall target. Moreover, the EU has determined that it would also like to increase its emissions reductions an additional 1 % annually through 2020.
The latest projections provided by the member states show that existing policies and measures will yield a total EU emissions cut of 4.7 % by 2010, or 3.3 % short of the Kyoto requirement, according to the European Environment Agency. To get the rest of the way, it says that countries of the EU must take other steps such as establishing a liquid market for emissions trading and developing sequestration of carbon by forest, soils and agriculture.
"Existing measures will not be sufficient for the EU to reach its Kyoto target," concludes a report by the European Environment Agency, which was written prior to the environmental ministers approving the trading scheme.

Emissions trading can work. In the United States, the 1990 Clean Air Act requires that 1980 sulphur dioxide (SO2) emissions from electric power plants be cut in half by the year 2010.
To achieve that goal, the Environmental Protection Agency allows utilities to emit one ton of the toxin a year per allowance held. If a plant reduces such emissions below its allowance, it will have leftover emission credits that it can sell to other utilities or anyone who wants to buy them.
Altogether, the program is responsible for cutting S02 emission levels, says EPA. In 1990, 15.7 mm tons of the pollutant were emitted and by 2000 that number had dropped to 11.2 mm tons -- a level that EPA expects to fall to 8.95 mm tons in 2010.
It cost industry about $ 1 bn to comply with the gradually lowered caps, says EPA. That's money that proponents of strict emissions and caps -- and of the Kyoto agreement -- say has actually spawned the development of more advanced technologies, which has led to new jobs and more productive enterprises across the economic landscape.

Trading is critical to the EU and other nations that must meet their commitments under the Kyoto Protocol. Denmark and Austria have already begun setting aside the money necessary to purchase emissions credits. And France, which has reduced CO2 emissions by 15.5 % from 1990 to 2001, is projected to fall short of its obligation under the global warming treaty unless the market for emissions becomes liquid and vibrant.
Germany, meanwhile, had opposed the emissions trading standard as too restrictive in large part because it is a heavy user of coal in power production. But, through a give-and-take process, Europe's largest emitter of greenhouse gases has apparently persuaded the EU to permit its own industries to form collective pools to trade those emissions. That avoids the need for those companies to do so individually, although each business will have to report its pollution levels even if it is part of a pool.

As long as targets are ambitious and rigorously monitored, the system of cap-and-trade should have a guaranteed environmental outcome. Individual companies throughout Europe have their own emission limits. Provided the overall cap is respected, however, they may buy and sell their "pollution permits" to reduce their costs without affecting the ecological target.
"The EU's decision provides a credible architecture," says Stephen Singer, head of the World Wildlife Fund's European Climate Unit in Brussels. "It paves the way for concrete action to meet Kyoto commitments." The Environmental Defence and the Environmental Law Institute agree, adding that concerns over emissions trading leading to so-called hot spots that would serve as hubs for unclean factors are "minimal."

The Kyoto Protocol has provided the framework by which nations that ratify the agreement will seek to reduce their greenhouse gas emissions. The emissions trading component of that accord is a vehicle by which those countries can reach their goals -- a concept that has already been shown to work in this country's acid rain program.
With Europe's aggressive stance on global warming, it must show the world that greenhouse gas emissions can be drastically reduced without irrevocably damaging national economies. Assuming that happens, the United States may eventually adopt the treaty while developing nations could speed up their timetables to come into compliance with it.

Alexander's Commentary

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