NCPA - National Center for Policy Analysis


January 3, 2006

Recently, the European Union (EU) launched the European Union's Emissions Trading Scheme (EU ETS) as a way to meets its Kyoto Protocol commitments to cut greenhouse gas emissions by 8 percent below what the EU emitted in 1990. An analysis by Ronald Bailey finds that the ETS is not significantly stopping global warming and costs far more than expected.

The ETS allows both CO2 producers and emitters to trade permits. It has allocated 2.2 billion allowances to emit CO2 among the 11,500 facilities it covers. According to Bailey:

  • Abyd Karmali (an energy consultant) estimated that the allocations have lowered emissions by perhaps 50 million tons compared with what they would otherwise have been in a business-as-usual scenario.
  • This is a negligible amount that will not affect global warming.
  • Even if all the cuts mandated by the Kyoto Protocol were achieved (a reduction of about 700 millions tons of CO2 emitted per year), they would spare the earth an insignificant 0.02 to 0.28 degrees of warming by 2050.

Despite the negligible effects, the ETS is expensive:

  • Before CO2 trading began, models devised by consultants projected that the price of a ton of carbon would be less than 10 Euros.
  • After opening at 5 to 7 Euros, the price rose steeply to nearly 30 Euros by September, before settling back at around 22 Euros.
  • Meanwhile, European wholesale electricity prices have soared, rising from about 28 to over 40 Euros per megawatt hour during the past year.

Bailey argues that the EU's experience demonstrates that even with economic markets, reducing CO2 emissions will be very costly.

Source: Ronald Bailey, "This Market is Sending A Signal," Tech Central Station, December 6, 2005.

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