California dreaming

California has caught the eye of the European Commission, as the EU steps up efforts to build a global cap-and-trade system for greenhouse gas emissions.

Linking the European emissions trading scheme (ETS) with similar non-EU mechanisms was listed by the Commission as a priority for this year’s review of the ETS. Formal proposals for the trading period after 2012 are expected at the end of this year.

In the meantime the Commission has begun informal discussions with the Californian authorities to see whether the two regions could work together on emissions trading from 2013.

Under the emissions trading scheme, companies are buying and selling from each other permits to emit greenhouse gases, particularly for carbon dioxide (CO2), the gas most often linked with global warming. Europe began its emissions trading system on 1 January 2005 with more than 11,000 energy-intensive installations, responsible for almost half of the EU emissions.

Many parts of the world are now thinking about following the EU example and starting their own carbon trading systems. Seven north-east US states plan to cap-and-trade CO2 emissions from power plants from 2009. Australia and New Zealand have also agreed to work together to design a model for carbon trading.

Many regions keen to learn from the EU’s two- and-a-half years’ experience have asked the Commission for technical advice on the practicalities of emissions trading, including how to measure emissions and how to bank trading credits.

Arnold Schwarzenegger, California’s governor, in March this year asked his administration to base its planned emissions trading scheme on the EU model. Schwarzenegger’s enthusiasm, supported by the fact that Californian trading is likely to start up around the same time as the reviewed European ETS, has made the western US state the most attractive partner for the EU for future trading.

California has built a reputation for caring more for environmental issues than the federal US government, which has no binding targets for reducing greenhouse gas emissions under the Kyoto Protocol. Schwarzenegger last September adopted a Global Warming Solutions Act for California - the first legislation in the US to set binding targets for reducing greenhouse gas emissions.

EU member states, led by the UK and Germany, have expressed interest in a trading system with California. The Commission has so far received no official mandate to negotiate and talks are, for now, part of an informal information exchange.

But if an EU-California trading mechanism is to go ahead, several problems will have to be overcome.

A first barrier to linking EU and Californian trading comes in the wording of the existing ETS directive. This allows Europe to link its trading system with non-EU cap and trade mechanisms, but only in "third countries" - something that would have to be changed before trading with the western US state could begin.

A more serious challenge will be ensuring that European environmental hopes are not undermined by a less ambitious trading system across the Atlantic.

Stavros Dimas, the European environment commissioner, has told member states to cut almost 100 million tonnes of CO2 permits from their proposals for 2008-12 emission trading. If California shows signs of taking a more relaxed approach with its own companies, the Commission will come under EU pressure to follow suit for post-2012 trading.

Some US trading analysts are also recommending a price cap on emission permits and government intervention to correct market imbalances. The EU, in contrast, has preferred a free market model.

Even the CO2 trading units are likely to cause transatlantic tension. The EU allocates permits for each tonne of CO2 emitted and would like the US to do the same. But a European metric tonne is slightly larger than a US imperial ton.

This fixed rate of difference could be calculated more easily than the fluctuating monetary exchange rates involved in financial markets, economists point out. But global emissions trading would be easier to monitor if everyone was using the same unit.

Many EU politicians and officials hope a link with California will be the start of a wider global emissions trading system. Dealing with Hollywood tough guy Schwarzenegger could be the early training they need.

California has caught the eye of the European Commission, as the EU steps up efforts to build a global cap-and-trade system for greenhouse gas emissions.