After the European parliament voted down a proposal to prop up its flagship emissions trading scheme (ETS), most observers finally admitted what has been obvious for a while: the program is contributing little to accelerating the decarbonisation of the European economy. However, a few eternal but confused optimists see the program as working just fine. Here are a few thoughts in response to that bit of push-back.
Carbon dioxide emissions are the consequence of economic activity and the technologies which we use to produce and consume energy. We measure technological progress with respect to emissions reduction by a reduction in the ratio of emissions to economic activity (GDP), called decarbonisation. To achieve aggressive emissions reductions goals – such as an 80% reduction by 2050 – requires annual rates of decarbonisation of 5% or greater. This figure provides a baseline against which to think about the performance of actual policies.
The EU ETS was created to put a price on carbon so that industry would factor that price into its decision making. It is the price which does the work in a cap and trade system for emissions reduction. The cap and the trading set the price, and the price creates incentives for innovation in energy consumption and production. The EU explains: 'The market price of allowances — the 'carbon price' – creates a greater incentive the higher it is.'
Conversely, there is a low incentive for innovation with a low market price. For those interested in accelerating the decarbonisation of the economy, the collapse of the price of carbon under the ETS is prima facie evidence of the program's ineffectiveness.
At the same time, it is the price which is the program's Achilles heel. While people in Europe and around the world have shown a willingness to pay a bit more for energy in support of environmental goals, that willingness has its limits. This reality – what I've called an iron law – means that efforts to motivate innovation through raising the price of energy are ultimately doomed to fail. fold]
There is some evidence that the ETS has simply put a price on business as usual. In The Climate Fix, I showed that Europe's rate of decarbonisation was essentially identical before and after the ETS was introduced. If the program is having effects, they have not been detectable beyond historical business-as-usual rates of decarbonisation.
The figure above shows the comparative performance of the US and the EU-27 with respect to overall emissions and emissions intensity (C/GDP) since 2000, based on data from the US Energy Information Agency. Both the US and the EU reduced aggregate emissions by 6.4% from 2000 levels and the US improved its carbon intensity by a slightly larger amount (21% vs. 19.5%). The similarity of the reductions indicate that, whatever impact the EU ETS has had, the US achieved similar results with no carbon market (and some might argue, with no climate policy at all).
With the US and the EU averaging ~2% per year since 1990, it is ironic indeed to see otherwise committed environmentalists acting as apologists for the EU ETS. The uncomfortable reality is that no policies have been put in place anywhere in the world that have indicated an ability to accelerate rates of decarbonisation to levels approaching 5% per year. That includes the EU ETS. If greater progress is to be made, debate will have to move beyond carbon pricing and the relative success or shortfalls of the EU ETS.