Business and climate change: Slightly greener

Europe goes for carbon trading, sort of

EUROPE is not finding it easy to enter the brave green world of carbon constraints. By signing the United Nations' Kyoto treaty on climate change, European Union governments promised to reduce, during 2008-12, emissions of greenhouse gases to, on average, 8% below what they were in 1990. To meet that goal, each EU country was required to agree a national emission target, and issue carbon-dioxide allocations to every big industrial facility - in essence, granting them formal rights to emit the leading greenhouse gas, carbon dioxide, a previously uncontrolled “pollutant.” Those firms unable to meet its target would be able to purchase additional carbon credits in a pan-EU market scheduled for opening in January 2005.

With each country's plan due to be submitted to the European Commission on March 31st, the past few weeks have seen bitter battles in many EU capitals - most notably Germany's. Some industry lobbies have been screaming that the economic costs of action will be ruinous. Those representing the EU power industry claim that tackling carbon could cost €2 billion ($2.4 billion) a year. The Confederation of British Industry talks of “the sacrifice of UK jobs on the altar of green credentials.”

However, several studies suggest that the economic cost of carbon constraints in the next few years will be slight - not least because of the option to trade. That is because different countries (and different firms and sectors within countries) have different unit-costs of reducing carbon-dioxide emissions. If no trading between high and low reduction-cost countries were permitted, according to one study by the Massachusetts Institute of Technology, Denmark's cost of meeting Kyoto targets would be four times higher than Britain's.

Within countries, too, all is not as gloomy, nor as uniform, as some businessmen say. Consider Britain, for example. Oxera, a consultancy, has just prepared a report for the Carbon Trust (a quango promoting a low-carbon future). Unsurprisingly, this notes that sectors that are energy intensive and face stiff global competition, such as steel, will face difficulties when carbon prices rise. On the other hand, some industries now squawking about costs might turn out to be unmolested or even winners: the paper industry, for example, and even the electricity sector. What matters is whether firms can pass on costs to consumers, and whether they have access to less-carbon-intensive technologies. On this point, some bosses agree. Ian Marchant of Scottish and Southern Energy, a utility with lots of renewable energy, said this week, “I can't see a scenario in which we lose.” So claims of impending economic disaster are probably overdone.

Some people regard the whole carbon exercise as a sham. After all, the Kyoto treaty may be unravelling: America abandoned it; Russia is now wavering. Without the latter, the treaty cannot enter into force. And, for all their green bluster, most European countries are not on target to meet Kyoto commitments. The March 31st deadline has proved largely meaningless. Germany barely finished its emissions plan in time. Most other EU countries did not. Spain, France and Greece blamed this on recent elections. Britain backed off at the last minute for no obvious reason.

In fact, something will (eventually) happen. The Kyoto treaty may fall apart, but the EU has passed laws making its targets binding. Andrei Marcu of the International Emissions Trading Association says that “Europe is now clearly committed to action on climate change, whatever happens to the Kyoto treaty.” As for missing domestic targets, Michael Grubb of the Carbon Trust reckons that “Kyoto was designed for the rich countries to miss their domestic targets. That's why we included international emissions trading.”

And this week's missed deadline? Much will depend on whether the European Commission now cracks the whip. Most countries are expected to file their plans within weeks. The commission has a right to review them. Benedikt von Butler of Evolution Markets, a greenhouse-gas brokerage, views the situation as a poker game: “everybody was waiting to see the other hands, especially Germany's, because nobody wanted to come out with the toughest emissions targets.”

In the end, the German government played a weak hand, demanding only a slight cut in emissions in the next couple of years. Other countries will now probably follow its softly-softly lead. Far from wrecking the EU economy, carbon constraints may be feeble in the early years of the scheme. Unless the commission makes countries toughen up their plans, worries Abyd Karmali of ICF Consulting, there may be such a lax regime of emissions allocations that “the greenhouse-gas trading market is cut off at its knees.”

That would be a great pity. As Jonathan Pershing of the World Resources Institute, an American think-tank, says, a successful launch would “validate the powerful notion that the market is a good place to tackle environmental problems.” The irony is that America fought for market-based instruments such as emissions trading to be included in the Kyoto treaty, while the EU violently objected. Now, with America turning its nose up at the whole business, it is the command-and-control Europeans that, however hesitantly, are pioneering carbon trading.

• Primary Source

http://www.ieta.org/ http://www.ieta.org/

http://www.carbontrust.co.uk/Pages/Default.aspx http://www.carbontrust.co.uk/Pages/Default.aspx

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