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Tacoma News Tribune

Valuable lessons from their growing pains

Jay Inslee
10 June 2007

When I spoke with British Prime Minister Tony Blair last Sunday at a global-warming forum in Berlin, one thing struck me: The Europeans have stolen our idea.

We Americans invented the “cap-and-trade” system, in which a government sets a cap on total pollution and allows businesses to trade allowances under the cap. Now it is time to take back that original American concept from Europe.

The first cap-and-trade system was instituted in the United States during the presidency of George H.W. Bush to reduce emissions of pollutants that cause acid rain. As a member of the House committee that will write global-warming legislation, I recently went on a bipartisan congressional fact-finding trip to Europe with five other lawmakers, including former House Speaker Dennis Hastert, to learn lessons from the European adoption of a cap-and-trade system designed to prevent global warming.

The premise behind cap-and-trade is to obtain a reduction of pollutants by setting limits on emissions and tightening them over time. Polluters must either reduce emissions below the set limit or purchase emission credits from facilities that don’t use all their allowances. This allows polluters to trade credits, providing built-in flexibility that lets the market select the most cost-effective and efficient ways of achieving required emission reductions.

I visited Biogasol, a cellulosic ethanol producer in Denmark, and a Vattenfall power plant in Germany with a carbon capture and storage facility. Both of these technologies will be closer to being commercially competitive once the European cap-and-trade system is fully operational.

Such a system has the prospect of boosting a range of Washington state companies, like Ramgen Power Systems, which produces clean-coal technology; Imperium Renewables, which makes biodiesel; and even The Boeing Co., which makes the world’s most efficient jet. By creating a cost for pollution, these clean-technology companies can flourish.

Congress is ready to reclaim cap-and-trade from Europe, which has been using the so-called European Union Emission Trading Scheme for two years to reduce carbon dioxide emissions from power plants and industry. It’s the largest carbon-trading program in the world. American lawmakers can learn some valuable lessons from the European experience as we craft cap-and-trade legislation.

The first and most important lesson is that cap-and-trade is working – from both an environmental and economic perspective.

Since 1995, carbon dioxide emissions in Europe have been reduced by 30 million tons annually. That’s equivalent to decommissioning more than 10 coal-fired power plants each year. Additionally, an environmental minister reported that Germany has created 1.5 million jobs associated with clean energy and has captured 20 percent of the world’s renewable fuels market. In fact, Germany met its 2010 target for renewable sources of energy this year.

One secret to Europe’s successes was creating separate pools for limiting greenhouse-gas emissions from utilities and industries. This allowed regulators to place more costs on utilities, instead of industries, thus avoiding the problem of industry losing its competitive edge in the international market.

European officials almost universally agreed that their cap-and-trade program has been a success, but they also were amazingly united in describing “teething pains,” or problems with their nascent system. They said repeatedly that their cap-and-trade system still enjoys the confidence of the people precisely because the first stage of the program was considered a trial period, with the expectation that there would be lessons learned.

Here are other lessons Americans can learn from Europeans when instituting a cap-and-trade program for carbon dioxide:

 • Europe’s original system was not sufficiently aggressive; emissions targets weren’t set low enough, and more free allocations were issued than were needed. This resulted in windfall profits by utilities that pocketed the free permits and then charged their customers what they called their “opportunity costs” – a scam worthy of Enron.

Had there been an auction of a significant part of the carbon dioxide allocations, a real price signal would have been sent to industry.

 • Europe’s trial system did not create a long-term price signal encouraging the development of clean-energy technologies. Fundamentally, Europeans recognized that a price of about 20 euros per ton was needed to create an incentive for the adoption of cleaner technologies. Since the trading scheme’s trial period ended and emission credits could not be banked from one period to another, the price has gone down to essentially zero. This argues both for a longer trial period and for allowing banking emission credits.

These may seem like daunting challenges. But the early news from Europe is positive. Even though the goal of the first phase of their cap-and-trade system was for no growth in greenhouse-gas emissions, some countries actually achieved reductions. Germany went from 1,230 million tons of carbon dioxide emissions in 1990, to just more than 1,000 tons in 2006. It’s on track to reach a 21 percent reduction target in 2012 by emitting only about 975 tons of greenhouse gases.

Germany now has a goal of hitting a 40 percent reduction target in 2020, which will put the nation under 740 tons of carbon dioxide emissions a year.

In short, Europe has enjoyed some real successes even though its first run at a cap-and-trade system had several flaws from the beginning.

There’s no doubt that Americans can improve on the European model. Americans had the ingenuity to create a cap-and-trade system that has been successful in reducing acid rain in the United States by more than 30 percent and lowering harmful nitrogen oxide pollutants by more than 70 percent.

We can do the same to implement an aggressive and effective trading scheme for limiting carbon dioxide emissions while promoting economic growth.

But this will not be the end of our efforts. The Europeans stressed that we have to use a suite of other tools, including green building standards, auto efficiency standards and renewable portfolio standards, like Washington state adopted last year with Initiative 937.

Last Sunday, I told Prime Minister Blair that when it comes to global warming, America’s days of denial are over and our days of action have begun. I’m confident one day soon America will reclaim cap-and-trade, this time applying it to carbon dioxide emissions.

U.S. Rep. Jay Inslee, D-Bainbridge Island, returned from a weeklong congressional fact-finding mission to Denmark, Germany, Belgium and England on Monday. He is the sponsor of the New Apollo Energy Act and co-author of a forthcoming book on the clean-energy revolution.