INSIGHT: EU emissions plan a costly failure - US

04 December 2008 16:47  [Source: ICIS news]

By Joe Kamalick


EU emissions scheme leakage could sink industryWASHINGTON (ICIS news)--A US federal study issued this week says that the three-year-old EU cap-and-trade climate control programme raised costs for industry and consumers and might push business offshore but apparently has not reduced emissions.


The US Government Accountability Office (GAO), the investigative arm of Congress, issued a 60-page analysis on the EU’s Emissions Trading Scheme (ETS), which came into force in 2005 and was designed to cap and reduce European release of carbon dioxide (CO2).


Boiled down to its fundamentals, the 60-page study essentially says that the EU cap-and-trade mandate hasn’t cut emissions or spurred green technology investments but it has raised costs for industry and consumers. 


In other words, all pain and no gain.


The GAO studied results from Phase I of the EU’s emissions trading plan, which began in 2005 and ran through 2007. The second phase is now under way and is scheduled to run through 2012. 


The first phase covered 11,000 European electric power and industrial installations in 25 member nations, which together account for about half of the EU’s annual carbon dioxide emissions.


Under the programme, the EU set a limit on the total amount of allowable CO2 emissions and distributed - free of charge - emissions allowances or permits to power plants, refineries, steel, glass and cement manufacturers and a variety of other industries.


Plants and other production facilities that had lower CO2 emissions than they were allowed could trade their unused allowances to companies whose operations exceeded permit levels. This trading ultimately generated a price of about $37 (€29) per tonne of CO2.


However, the creation of a carbon trading market was the only tangible result of the three-year effort - and the cost of acquiring carbon allowances was largely passed on to consumers.


"According to available information and experts, the primary effect of the first ETS phase was to establish a functioning carbon market for allowances, " the GAO said. "But its effects on emissions, the European economy and technology investment are less certain."


Less certain, as in could not be measured, negligible or unknown.


The GAO said that some of the experts it consulted view ETS "as a flexible and cost-effective tool to reduce emissions" - even though there is no hard evidence to support that conclusion.


"Alternatively, other observers have said that the first ETS phase did not decrease emissions, imposed high costs on industrial entities and consumers, and may adversely affect the international competitiveness of European industries," the study said.


"The ETS’s cumulative effect on emissions across the EU member states is uncertain," the analysis added. "While several researchers and about half of the experts concluded that the ETS resulted in a cumulative decrease in emissions compared to a business-as-usual scenario, the European Commission told us that data limitations preclude definitive conclusions about the ETS’s effect during phase I."


Nor could the GAO determine the impact of the emissions cap-and-trade programme on the European industrial base, specifically whether "covered entities shifted [operations and capacity] to countries that have not adopted binding emissions limits, a concept known as leakage". 


That concept also is known as industrial flight or jobs destruction.


"According to available information, leakage did not likely occur because ... facilities received allowances for free, based on projected emissions," the study found. (Note, however, that the conclusion that leakage did not likely occur is based on available, as in incomplete, information.)


The fact that EU allowances were distributed free of charge is a crucial point. 


Cap-and-trade proponents in the new and stronger Democrat-majority US Congress and the incoming administration of President-elect Barack Obama favour auctioning emissions permits in a cap-and-trade mandate they expect to enact in 2009 or 2010.


The additional cost burden of an allowances auction is almost certain to create a lot more "leakage", as the EU so delicately describes industry flight.


"Some ETS participants have stated that auctioning allowances rather than freely allocating them would increase costs and therefore may increase leakage risk among globally competitive industries covered under the ETS," the GAO report said.


"According to some of the energy-intensive industries, their covered entities would not be able to pass allowance prices on to consumers while remaining competitive with entities outside the ETS that are not subject to carbon constraints," the report added.


In addition to the increased costs on industry and consumers, the potential for undermining the EU’s industrial base and the apparent lack of emissions reductions, the programme also failed to trigger a new dawn in green technology investments and innovation.


This has been a major selling point among US advocates of a federally mandated cap-and-trade system, the theory that industries faced with increasing costs for carbon permits will simply pour money into developing alternative technologies that will either provide emissions-free power or extremely low emissions production equipment and processes.


But the GAO found that in the first three years of the EU programme "the effect of the first ETS phase on technology development and innovation is uncertain but likely minimal".


That may be, the GAO speculated, because the first phase of the EU programme was compressed - only three years - and consequently "did not provide enough time to effect investments in clean technology".


Or, just maybe, the theory is dead wrong, and that manufacturing firms facing government-mandated carbon costs and related price increases for electricity and fuels won’t decide to pour money into alternative energy research and instead will simply move offshore, taking jobs with them.


Congressman Joe Barton (Republican-Texas), ranking member of the House Energy and Commerce Committee, and other House Republicans called on the GAO in July 2007 to conduct the study amid growing press reports that the EU cap-and-trade programme was not working as planned.


"This report indentifies some of the potential risks and concerns about regulatory cap-and-trade and related rationing schemes," Barton said of the GAO study.  "It further underscores my concerns that we should not follow Europe’s course as it creates potential economic disaster for its citizens."


Congressman John Shimkus (Republican-Illinois), ranking member of the House Energy and Commerce subcommittee for oversight and investigations and among those who called for the GAO study, said the analysis demonstrates that "the whole idea of a cap-and-trade system isn’t a proven method of actually reducing carbon emissions".


"The American public will end up the victims and will have to pay more for energy and many other products," Shimkus predicted.


Given the results of the EU experience as outlined by the GAO investigative arm of Congress, is it likely that the 111th Congress will shy away from so drastic a measure as a mandatory cap-and-trade emissions law?


Probably not. Despite the apparent failure of cap-and-trade to reduce emissions or stimulate green technologies, such a proposal still has huge appeal for Congress: Revenues.


Many in industry regard cap-and-trade as an outright revenue scheme, imposing a heavy tax on energy, production and consumption. 


A US cap-and-trade mandate conceivably could raise billions, perhaps even trillions of dollars over a 40-year implementation period in allowances auctions, a revenue windfall that Congress would then get to spend.


($1 = €0.79)


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By: Joe Kamalick
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