Global Warming Response — Markets or Taxes?

Coordinate carbon trading markets

Friday, March 23, 2007

By Joe Nation

AFTER years of inaction, governments and others are taking steps to reduce greenhouse-gas emissions. Yet, as the planet careens towards certain climate disruption, there is no international agreement to coordinate these efforts. There should be.

The best approach to curbing emissions is the development of a carbon market, sometimes called “cap and trade.” A cap and trade system limits total emissions, then creates a market where emissions credits are traded. There are advantages to this approach, compared with a carbon tax, which is politically infeasible. A carbon market provides flexibility in meeting emission reduction targets, and it delivers those reductions in the most cost-effective manner.

The difficulty today is that there isn’t one carbon market, but several regional markets that are not linked. One global market would deliver a more efficient market and reduce emissions more quickly. This patchwork of regional markets will face difficulty in setting common rules for trading.

For example, how do markets agree which emissions credits will be permitted? How can markets with potentially disparate characteristics build confidence among investors, who will fund this emerging low-carbon global economy?

California is designing a carbon market that will launch in 2012. In the Northeast, several states, led by New York, have created the Regional Greenhouse Gas Initiative and aim to hold emissions from power plants at current levels through early 2015, then reduce emissions 10 percent more by 2019.

In the European Union, a market system is already operating. Last year, more than 1 billion tons of greenhouse gases were exchanged at a value of $24 billion. The second phase of trading, corresponding with the first phase of the Kyoto Protocol, will begin in 2008 and end in 2012. Europe is also preparing for a third phase of trading starting in 2013.

Confused yet? It could get worse. In addition to this growing number of regional efforts, there are no Kyoto Protocol reduction targets in place after 2012. So businesses and others face tremendous uncertainty as to what any future carbon market might look like. We need to quickly conclude an international agreement that is more aggressive than the Kyoto Protocol.

Kyoto, adopted initially 10 years ago, has not been successful, despite its initial fanfare. Why? The United States bears primary responsibility for its failure to ratify Kyoto or to seek meaningful alternatives. But there are other problems.

Kyoto failed to require emissions reductions in the developing world, especially China, which is now likely to surpass the United States as the planet’s top emitter of greenhouse gases in the next two years, not in two decades as thought just a few years ago.

Kyoto’s results also have been disappointing. Under Kyoto, the United States was to reduce emissions 7 percent below 1990 levels by the year 2012. Emissions in 2004 were already 16 percent higher. Greece’s Kyoto target was an 8 percent cut, but by 2004, emissions were up 27 percent. Spain won’t come close to their targeted reduction of 8 percent; instead, overall emissions are up 49 percent. Only two European nations, the United Kingdom, and Sweden, appear certain to achieve their 2012 targets.

At a recent conference, Point Carbon, an information and analytic service, speculated that the United States would not join any post-Kyoto agreement until 2015 and would not become a “full member” of an international agreement until2018. That time line is much too late. We need to accelerate the launch of a global carbon market.

At current trends, the level of carbon dioxide (in parts per million in the atmosphere) will climb from roughly 382 today to perhaps 412 by 2018, making it far harder to keep global average temperature increases to a minimum. At the same conference, former Vice President Al Gore called for a new post-Kyoto agreement by the year 2010. Gore argues that we simply don’t have the time to wait, given the increasingly bad scientific news on climate change. We should do the same in California and set a goal of advancing the start date of our own carbon market to 2010, rather than 2012. And even if the United States fails to act, California should move up its start date.

In both California and at the international level, we should also establish a trading commitment period from 2010-2030. That will address another problem: limited investment in emissions reduction projects beyond 2012.

In the end, a reality exists.  An international agreement on climate with an early start date and a long commitment period will matter far more than all of our good work at the regional level.  We need that agreement now.

Joe Nation, a former member of the state Assembly, teaches microeconomics and climate change at the University of San Francisco.