Gaming Cap-and-Trade, Lessons from the EU

November 14th, 2008

Posted by: Roger Pielke, Jr.

On several occasions I’ve pointed to the role of Poland in the unfolding climate debate in Europe. Poland has balked at EU proposals for decarbonizing its economy, primarily because Poland relies on domestic coal for 95% of its electricity. What we should be watching for is not if the EU comes to an agreement — it will — but how that agreement is reached. A Reuters story yesterday provided some hints as to what it will take to secure Poland’s agreement, and surprise surprise, the issues are cost and technological certainty:

Poland’s prime minister said on Thursday he believed a deal in December on a European Union climate package had come closer following his talks with French President Nicolas Sarkozy on the issue.

Poland and other ex-communist EU members are worried that the package, which aims to slash emissions of greenhouse gas carbon dioxide (CO2) by a fifth by 2020, will harm their economies, already reeling from the global financial crisis.

“I must say our points of view are very close to each other now,” Prime Minister Donald Tusk told a news conference after his talks with Sarkozy at the Elysee Palace.

“We are without doubt much closer to success at the December meeting (of EU heads of state and government) than only a few weeks ago.”

“There will also be good proposals for other countries that were worried about some elements of the package,” he added.

Tusk said he would invite the prime ministers of the Czech Republic, Slovakia, Hungary, Bulgaria, Romania, Latvia, Estonia and Lithuania to a meeting with Sarkozy in the Polish Baltic port of Gdansk on December 6.

“We (Tusk and Sarkozy) promised each other we will do our necessary share of the work to ensure we can say in Gdansk that we have reached agreement (on the package) and will take that deal to the (European) Council,” Tusk said.

Earlier, a senior Polish government source said there had been progress on Warsaw’s proposal to introduce upper and lower limits on the price of permits to emit CO2 — a “price corridor” — under the EU’s Emissions Trading Scheme (ETS), the flagship of the 27-nation bloc’s efforts to combat global warming.

The ex-communist nations mostly oppose introducing full auctioning of emissions permits for utilities as of 2013. Poland, which wants a more gradual move to full auctioning, has said it may veto the package if its demands are not met.

Poland has also proposed another mechanism that would make the climate package more acceptable for its coal-based economy.

The “specific fuel benchmarking-auctioning” would set free emission quotas for producing a certain amount of energy that would equal the emissions by the cleanest and most technologically advanced energy producer from a certain source.

Other utilities would only have to buy permits to cover the difference between this set amount and their real emissions.

The senior source said Poland could be offered some limited form of benchmarking-auctioning for a few years, not until 2020 as it would prefer.

The details are complex (always an advantage when trying to avoid policy goals) but the bottom line is that mechanisms like a “price corridor” and “specific fuel benchmarking-auctioning” are ways to avoid the effects of the EU climate policy. The fatal flaw of cap and trade is that the incentives required to secure political agreement invariably undercut the policy goals. The same is true in the U.S. and I expect that any future cap and trade program put forward by the Congress will have more than its share of “safety valves” and “backdoor escape hatches” and “pilot ejector seats” to limit the policy’s potential effectiveness.

When politics and policy move in different directions, policy failure is the inevitable result.

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