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Hats Off to Cap-and-Trade

Jun 20, 2008
As everyone knows, the U.S. has never ratified the Kyoto Protocol treaty. Nevertheless, most of the rest of the world takes a less blasé attitude toward the impending doom threatened by global warming. The European Union (EU), in particular, has led the way in taking responsibility for initiating steps to lower its greenhouse gas emissions.

The EU has just completed a three-year “trial” period for an Emissions Trading System (ETS), popularly known as a cap-and-trade system. A report released by The Pew Center on Global Climate Change entitled, “The European Union's Emissions Trading System in Perspective,” written by A. Danny Ellerman and Paul Joskow of MIT, contains the following good news:

Although there have been plenty of rough edges, a transparent and widely accepted price for tradable CO2 emission allowances emerged by January 1, 2005, a functioning market for allowances has developed quickly and effortlessly without any prodding by the Commission or member state governments, the cap-and-trade infrastructure of market institutions, registries, monitoring, reporting and verification is in place, and a significant segment of European industry is incorporating the price of CO2 emissions into their daily production decisions ... The initial challenge is simply to establish a system that will demonstrate the societal decision that GHG emissions shall have a price and to provide the signal of what constitutes appropriate short-term and long-term measures to limit GHG emissions. In this, the EU has done more with the ETS, despite all its faults, than any other nation or set of nations.
The report provides a good understanding of the complexities of a cap-and-trade system, as well as offering a blueprint for the U.S. and other johnny-come-latelies who are going to have to move with some dispatch once they realize the extent of the challenges we are facing.
tags: Environment | Greenhouse Gases and Global Warming | Economics

Read the Report

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