NCPA - National Center for Policy Analysis


August 12, 2005

The European Union's carbon-trading scheme is a failure on two fronts. It has significantly raised energy costs, and EU CO2 output has almost certainly risen rather than fallen. And this is all before round two of the Kyoto agreement, which calls for even deeper cuts and greater penalties, says Dan Lewis, director of environmental affairs for the Stockholm Network.

Carbon trading made more sense 10 years ago, when natural gas was inexpensive and abundant. For as long as gas cost less than coal, carbon mitigation could be achieved on the cheap. However, as the environmental and economic benefits of gas became clear, a supply bottleneck developed. The result was that last year, throughout Europe, the price of coal fell below that of gas. Because coal typically creates two to three times more carbon dioxide than natural gas, this meant higher emissions, explains Lewis.

  • According to a recent research report by UBS, a banking group, CO2 costs are now the key driver of electricity prices on the Continent.
  • In Germany, for instance, they are to blame for a 15 percent rise in electricity prices since the start of carbon trading last December, to 39 euros per megawatt-hour (MWh) for 2006 from 34 euros MWh.
  • The report also notes that "a further 2 euros to 4 euros MWh is yet to be priced in."

In the meantime, energy-intensive industries, such as aluminum and steel, are likely to consider closing down plants and relocating outside the EU to countries where emissions compliance costs are lower. Perhaps then a reduction in CO2 would ensue, but at what cost in prosperity and jobs?

What's more, the reduction would only occur in Europe: Emissions would simply rise in places -- say, China or India -- where those plants relocated. The overall picture would be unchanged, says Lewis.

Source: Dan Lewis, "Europe's Low-Carbon Diet," Wall Street Journal, August 10, 2005.

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