Europe's emissions trading system turns 10 - a success worthy of reflection

This post was adapted from a speech Frank gave at recent conference on the European Union’s emissions trading scheme, held in Florence, Italy.

The European Union’s Emissions Trading Scheme recently marked its 10th year in operation, an anniversary worthy of reflection.

When an emissions trading system is designed well and implemented effectively, it does what it says on the tin – it delivers substantial reductions in emissions, and in ways that minimize the costs of doing so.

Requirements for success are:

• a cap on emissions that is challenging to meet, and that reduces over time.
• a monitoring, reporting and verification system that is credible.
• a system for periodic review of performance and adaptation to changes in circumstances.

As permits are bought and sold, a price emerges from this trading. That signals to polluters that money can be made if emissions are reduced, which is the real genius of the system.

While there have been obstacles and setbacks over the past 10 years, by each of the measures above, Europe’s carbon trading system is a success.

I have two propositions as the system, also known as EU ETS, enters its second decade of existence.

One, that we recognize the extraordinary achievement of the EU ETS in both emotional and evidence-based terms. Two, that we recognize the extraordinary talents that have brought it into being and continued to nurture this trailblazing approach to carbon reductions.

The elegant simplicity of the market

When French author Stendhal visited the Basilica of Santa Croce in Florence in 1817, he was so overcome by the beauty of Giotto’s frescoes that he began suffering heart palpitations. “Life was drained from me; I walked with the fear of falling,” he wrote.

Stendhal’s experience gave rise to a fashionable nervous complaint called “Stendhal’s syndrome” or “hyper kulturemia,” and pretty soon tourists were dropping like flies, overwhelmed by a city so beautiful that it made them faint.

Every time I think of the elegant simplicity and efficiency of the continent’s carbon market I am overcome with Hyper Tradingemia, and come close to fainting with ecstasy.

Markets and economic growth are often associated in the popular mind with environmental destruction. With emissions trading it is precisely the reverse – this market is designed to protect and enhance the environment.

Extraordinary talent made market a success

There are at least two individuals who have been critical to the achievement of the market. One is Dan Dudek, who led Environmental Defense Fund’s charge against acid rain.

Being first takes enormous courage, perhaps close to foolhardiness, but Dudek, EDF President Fred Krupp and their colleagues took those risks when tackling acid rain. Like Machiavelli, Dan acted on the proposition that “Never was anything great achieved without danger.” We are the beneficiaries of his courage.

The Economist hailed the acid rain trading program, the first application of this idea at any scale, as the “greatest green success story of the decade,” such were the impacts. The program reduced emissions of sulphur from power stations by 50 percent at a cost that was much less expensive than previously estimated. 

This achievement made it so much easier to sell the conservative Europeans on the merits of trading.

I turn now to another protégé of Machiavelli, called Jos Delbeke, who has led the effort by the European Commission to create and sustain the EU ETS. His particular skill is getting what can be done to as close as possible to what should be done, and that, like Leonardo da Vinci, “he knows how to see.”

Jos always gets more out of a situation than the starting balance of power would suggest.

He secured agreement to proceed in the first phase of the scheme by giving allowances away for free, and allowing a very modest cap to be set. But he also ensured that there was sufficient flexibility so that the cap was reduced substantially over time, and this will continue, and allowances will no longer be free for the power sector. 

New markets learn from Europe

Imitation is said to be the sincerest form of flattery, and Europe’s emissions trading market has been flattered around the world. Now programs link California, Canada, and elsewhere, and China has been learning from a number of pilot systems with a view to establishing a national system.

It’s wonderful to see that the seed that was planted with the acid rain program, and that grew with Europe’s carbon trading initiative, is becoming a global movement.