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EU has a lot to learn from US carbon emissions trading systems


Trading systems are increasingly being used by countries and regions to reduce the amount of carbon emissions in the atmosphere. Dallas Burtraw at the Resources for the Future in Washington DC is one of the leading experts in this field. In May 2017 he shared his experiences with Swedish policy makers, firms, and academics at the School of Business, Economics and Law.

Ever since the European Union’s Emission Trading System (EU ETS) was first established in 2005 it has been critisied for being ineffective in reducing carbon dioxide emissions, primarily due to consistently low prices and too generous allocation of emission rights.

A price on emission rights, or allowances, that is persistently lower than anticipated is bad news for the efficiency of an emissions trading system since a low price means less incentives for new investments which for the EU ETS means less investments in renewable energy and energy efficiency. Since lower than expected prices is a common feature in most emissions trading programmes up to date there is an ongoing discussion how this problem could be addressed.

Minimum price?

In North America there are four similar programmes which like the EU ETS rely on auctions as the primary mechanism for distributing emissions allowances. But there is a big difference.

"All four of the North American programmes have a minimum price in the auction, which has been a huge improvement. Europe has opted for the market stability reserve, which is an indirect method to achieve the same result of supporting the price in the allowance market", says Dallas Burtraw.

The market stability reserve will be activated from 2019, which means that the reserve will adjust the auction volumes by automatically placing allowances into or releasing allowances from the reserve, depending on the number of allowances in circulation.

Åsa Löfgren, associate professor in economics specialising on environmental regulation believes that the European trading system can learn from the North American systems:

"The efficiency of the EU ETS can be improved by adopting a reserve price in the auctions of allowances. This would in my view be a better and more transparent change of the EU ETS to support the price than implementing a market stability reserve. There seem to be some confusion within the EU that a reserve price would be the same thing as a tax, but that is wrong. A reserve price should be possible to implement also in the EU ETS."

Developments in the US

Dallas Burtraw is now working on developing the regional programme involving RGGI, which includes nine different US states.

"The idea we have been working on is called an emissions containment reserve, which would cause the supply of emissions allowances to adjust if prices fall below expectation. Of course the price floor does that, but in emissions markets there is no adjustment to supply if prices fall substantially but stay above the price floor. The new mechanism would cause the supply to adjust in incremental ways. This is just the way commodity markets usually work. For example, if the price of natural gas is low, we expect to see less natural gas enter the market."

He is not too worried about the future of the emissions trading systems despite the fact that president Trump has shown very little interest in climate initiatives.

"Trump has forced the US to take its foot off the accelerator on climate policy at the national level, but he will not be able to do much to reverse course. At the state level there is a reaction to the Trump policies. Several states are pursuing new initiatives", says Dallas Burtraw.

Policy seminar

The seminar 'Making emissions trading work - The North American experience' was organised by Mistra Carbon Exit, IVL Swedish Environmental Research Institute and the Department of Economics at the University of Gothenburg.

Ficre Zehaie from Swedish Environmental Protection Agency found the experiences from North America very useful.

"The seminar had policy making in practice as a starting point. The problems related to emissions trading can be found in many environmental policy areas. It was interesting to learn how to find solutions to improve policies when optimal policies are not in place. It was a long time ago since I attended a seminar which felt so relevant for me as a policy practitioner and where I learnt so much", says Ficre Zehaie.