Europe's Emissions Trading System: The Good, The Bad, And The Ugly

Did you know that the European Union forces companies to report their greenhouse gas (ghg) emissions to the stock market? The ambitious Emissions Trading System, or ETS, began in 2006 and promises to reduce carbon emissions by four million tonnes before 2021. The question is, do we want to recreate it in the United States?

First, we need to discuss how the Emission Trading System (ETS) works.

ETS utilizes a “cap and trade” technique that sets a limit on the amount of something that may be used or produced. In this case, each company must keep their ghg emissions below a certain amount or bear the consequences. Consequences include a lower reputation and being required to purchase allowances for the excess emissions. If a company produces more ghg than they are allowed, they have to literally pay for it. If they produce less, they can be financially rewarded for it by selling their allowances to someone else.
To make the ETS work in a real life environment, it was designed to operate in several stages. The first sets a relatively high cap, which will be easier for heavy polluters to reach. With each stage, the cap is reduced so that ghg emissions will continually lessen until the desired goal of four million tonnes has been achieved.
The ETS plan addresses several problems:
● it forces companies to engage in regular, accurate emissions testing
● it makes companies accountable for their ghg emissions financially
● it puts emissions in the spotlight

What holds the ETS back

Europe’s ETS plan only covers 45% of Europe’s ghg emissions because there are sectors in which testing for ghg emissions is unreliable.
The plan does cover carbon dioxide, nitrous oxide, and Perfluorocarbon emissions from the major offenders like power and heat facilities, metal works, paper plants, and even airline flights.
In the first phase, emissions in the EU rose by 1.9%. Now, the EU states that this rise is significantly lower than what would have occurred without the ETS system. Also, many countries in the EU did lower their emissions, including Austria, Belgium, France, Ireland, Lithuania, Portugal, Sweden, and Slovakia. Sweden’s emissions fell by 20%. The overall rise occurred because some of the other countries’ emissions rose enough to counterbalance the positive change. Finland’s emissions rose by a disheartening 28%.

What people think really makes EU’s Emission Trading System stink

The book Carbon Trading  – How it works and why it fails , states that many polluters actually gained “windfall profits”. Companies raised the cost of electricity to accommodate the allowances, and they gained shareholder benefits from their supposed changes. No rule has been put into place to ensure that these profits will be utilized for sustainability. It also seems the EU has provided so many allowances to companies that the cap has been ineffective, at best.
The truth of the matter is, many countries did see a significant decrease in emissions. The overall rise in emissions is low, probably much lower than it would have been without the cap and trade system. We must ask ourselves if the pitfalls that have marred the EU ETS can be rectified? Do you have any ideas of how to prevent these same problems reoccurring if we tried to recreate the ETS?