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The Wall Street Journal: U.S. Tries to Avoid EU’s Carbon-Trading Woes

By ERICA HERRERO-MARTINEZ
July 31, 2007

LONDON — European officials are urging air-pollution authorities in several U.S. states to avoid the problems that have plagued Europe’s system for trading carbon-emissions credits since it was set up 2½ years ago.

The U.S. doesn’t plan to introduce a nationwide emissions-trading system, but 10 Northeastern states are trying to set up their own emissions-trading system, starting in 2009. California also aims to set up a program, though it hasn’t set a date. Officials in those states are now looking to Europe’s experience in carbon trading as they sketch out how their own plans will work.

But the European Emissions Trading System, or ETS, hasn’t gotten off to a great start. That system’s first phase, which began in January 2005 and will end in April 2008, has proven largely ineffective, leaving companies with almost no incentive to cut their emissions.

Trading emissions credits is one of the main ways countries that signed up to the Kyoto Protocol in 1997 provide an economic incentive to cut carbon emissions, which are believed to be the main factor behind global warming. Under the “cap-and-trade” system used by the European Union, regulators cap emissions from companies such as manufacturers and power producers, which buy and sell credits to meet these commitments. A company that has overshot its limit can buy a carbon credit from one that has emitted less than its cap.

The deficiencies of the European system have been part of increasing trans-Atlantic discussion as U.S. policy makers explore the idea. In March, a U.S. Senate committee met with EU officials as well as representatives from Electricité de France SA and Royal Dutch Shell PLC’s Shell Oil. Last year, California Gov. Arnold Schwarzenegger signed an agreement with the former British prime minister, Tony Blair, to share information on emissions trading.

On June 1, a group of 15 scientists, policy makers, and emissions traders from Europe and the U.S. published recommendations for designing a greenhouse-gas cap and trade system for California’s government. The group, called the Market Advisory Committee, said that “the bedrock foundation of a successful trading program is a rigorous system for collecting accurate data.” Peter Zapfel, policy coordinator for Emissions Trading at the European Commission and a member of the MAC, said in an interview that the “biggest lesson we learned since we launched the EU ETS is that you need the caps to be based on very solid data. We didn’t have verified emissions data when we started.”

Europe learned that lesson in April 2006 when the first verified emissions data were released. Those figures showed actual emissions in 2005 were far lower than the caps set by individual governments and the European Commission. As a result, carbon prices fell about 70% in three days, and have remained extremely low.

The European ETS suffered a massive dent to its reputation. Critics, including European Energy Minister Andris Piebalgs, deemed the trading system, or at least its first phase, a failure, because the price was too low to drive investment in cleaner technologies.

The collapse was due to a lack of verified historical data on which to base the caps. The EU had used countries’ and companies’ own unverified and often incomplete estimates of how much CO2 they were producing, because no national systems had been set up to monitor emissions before trading in the EU program started.

The 10 U.S. states — Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, New York, New Jersey, Delaware and Maryland — are taking part in the Regional Greenhouse Gas Initiative, a linked cap and emissions-trading program.

Mr. Schwarzenegger has said he would like an emissions-trading system to be set up to help his state comply with a 2006 state law. The law says California must cut its emissions back to 1990 levels by 2020 — about a 25% cut compared with current projected emissions for 2020. The states involved are accumulating emissions data in advance to ensure they don’t make the same mistake as the EU. Companies that will have to use the system are happy that they are doing so.

“We believe a credible reporting system of greenhouse-gas emissions is the first step in developing government policy and corporate programs that will change behaviors, spark innovation and deliver reductions of greenhouse-gas emissions,” said Bob Malone, chairman and president of BP PLC’s BP America. In the U.S., recording emissions data is already further forward than it was in the EU in 2005, when carbon trading started there.

In May, 31 U.S. states launched the Climate Registry, a nonprofit organization that aims to create a common reporting system for, eventually, all 50 U.S. states. The aim is to create “an accurate, complete, consistent, transparent and verified set of data supported by a robust accounting and verification infrastructure,” the Climate Registry says.

The registry incorporates earlier initiatives to record emissions. The California Climate Action Registry was set up in 2001, while most of the U.S. states involved in the Regional Greenhouse Gas Initiative began recording emissions data in 2003. Under both registries, companies measure their own emissions, which are then verified by independent contractors. This is much the same system as the EU uses today.

But U.S. officials will also be closely watching how Europe resolves the next set of questions its system will pose. For the second phase of its system, which will begin next year, the European Commission is using the verified emissions data it accumulated for 2005 and 2006 to set much tougher caps for each country.

Those new caps have proved controversial. After complaints by industry and power producers, countries like Poland, the Czech Republic, Hungary and Slovakia have launched legal action against the commission’s rulings, complaining that the strict limits will hurt their economic growth.

Write to Erica Herrero-Martinez at erica.herrero-m[email protected]

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