Wednesday, April 07, 2004

Trading Carbon Credits
Even though the Kyoto Treaty on climate change lacks the required number of signatory countries to go into effect, the European Union is moving ahead with measures to reduce emissions of carbon dioxide and other "greenhouse gases" (GHGs). At the same time, some EU leaders are expressing concerns about the competitive handicap these limits may create. The latest Economist includes an update on where emissions trading, which can reduce the cost of compliance, fits in the EU's plans.

In this type of trading, parties that can achieve reductions in emissions at relatively low cost are able to sell their excess reductions to others facing higher costs. This is classical economics at its purest, and it produces benefits not only for the participants, but for society as a whole, as the total cost of achieving the same reductions is driven down to its most efficient level.

The application of trading to environmental issues was first demonstrated in the US, with the establishment of a market for acid rain and smog-causing sulfur emissions. This program has not suited everyone, with some Northeastern states downwind of plants that purchased credits in lieu of reducing their own emissions complaining and passing laws to limit trading. Still, it has arguably reduced overall power plant pollution, while keeping electric rates lower than if all generators had been required to reduce their own emissions.

Emissions trading is ideally suited to addressing the concerns of climate change, because it is truly a global issue. A ton of CO2 emitted in Brazil is exactly equivalent in its impact on the climate to a ton emitted in Boston. The regional and "downwind" issues that have bedeviled sulfur and nitrogen oxide trading are simply irrelevant to GHGs.

The larger EU emissions market now under discussion is a follow-on step to a number of national programs, starting with the UK's, which has been in effect since 2002. As the Economist points out, it is ironic that Europe is now proceeding to implement emissions trading, while it is off to a slower start in the land of its birth.

Here, without a firm cap on output driven by government policy, trading has so far been limited to a modest number of forward-looking companies that see it as an attractive hedge against potentially much higher costs of cutting their GHG emissions in the future. The importance and value of emissions trading is likely to grow significantly, should a Democratic administration take office next January.

And a follow-up from a colleague concerning yesterday's posting:
NPR carried this story concerning opposition to a promising gas discovery in New Mexico.

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