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Let the Market Decide How Much Polluters Owe
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The Pollution Trade

Here are portions of an article that appeared in the Philadelphia Inquirer (U.S.).

Seven months after the Kyoto global-warming accord took effect, Europeans are transforming their economies to meet the treaty's requirement of curbs in greenhouse-gas emissions. And central to that effort is an American-backed, free-market approach that Europe initially resisted: Buying and selling the right to pollute.

In the late 1990s, when the United States was still participating in Kyoto global-warming treaty negotiations, the Clinton administration recommended that the rest of the world embrace a system known as "cap and trade." Under the arrangement, which had been used successfully to fight acid rain in the United States, companies and governments are given a choice of either reducing carbon-dioxide emissions, or paying someone else to do so.

Trading emissions is designed to factor the social cost of fighting climate change into economic decision-making, rewarding investments in cleaner technology but letting the market decide how best to reduce pollution. European leaders went along.

Then the Bush administration and the U.S. Senate abandoned the Kyoto process. Now, the American-inspired system of carbon-emissions trading has become a main feature of Europe's plan to reduce its emissions of the gases that cause global warming.

Although not without problems, the system is winning positive reviews from the business community.

"Carbon trading, which used to be regarded as a fantasy marriage of environmentalism and economics, is now seen as the least costly, least distorting and most effective way to curb carbon emissions," an Economist magazine editorial said in June.

"It's ironic really, because emissions trading was not on Europe's agenda," said Andreas Arvanitakis, a senior consultant with Point Carbon UK, one of the many consulting firms that has sprung up to service Europe's new $60 billion carbon-trading market. "It was very much something that the Clinton administration brought to the table ... Before you knew it, though, the U.S. had pulled out, and emissions trading had become a way of life in the European Union."

The market launched just nine months ago, but earlier this month, the European Carbon Exchange in Amsterdam, the main trading venue for emissions credits, announced that it had reached a milestone of 50 million tons of carbon dioxide traded. The right to emit a ton of carbon, which began trading at about $10, is currently going for $27.60, an increase that analysts say signals a robust market.

The EU program is a forerunner to the larger Kyoto emissions-trading system, which starts in 2008 for all Kyoto signatories, including Russia and Japan.

The free-market approach has increased the overall cost of power energy, but not nearly as much as has the skyrocketing price of oil, experts say. The system also has spawned some unusual arrangements, such as the Dutch government paying to build a modern landfill in Brazil. Countries are allowed to buy some of their credits in the developing world, where they are cheaper, on the theory that reduced emissions anywhere benefit the planet.

It is too early to tell how the trading program is affecting emissions. Emissions in many European countries were up in 2003, the most recent year for which data are available. But EU officials say total emissions are running 2.9 percent below 1990 levels. Kyoto targets require them to be 5 percent below 1990 levels by 2012.

Among the best performers has been Britain, which according to the United Nations reduced emissions 14.5 percent from 1990 through 2002 during a record economic expansion.

Many experts -- including some U.S. business leaders -- say they believe that mandatory emissions trading will become a fact of life in America once the United States joins Europe in making a commitment to dealing with the potentially disastrous implications of climate change.

Some U.S. companies and one state, New Mexico, already have joined a voluntary emissions-trading program, as governors, mayors and business leaders move past Washington's go-slow approach to the issue.

"The debate is over... . We know the time for action is now," wrote Republican Gov. Arnold Schwarzenegger in a British newspaper, touting California's moves to reduce greenhouse emissions.

Philadelphia's Mayor Street is among 131 mayors who have signed a pledge agreeing to meet what would have been Kyoto's U.S. target -- emitting 7 percent less carbon dioxide than 1990 levels by 2012.

In August, nine northeastern states, including New Jersey and Delaware but not Pennsylvania, announced a preliminary agreement to launch an emissions cap-and-trade scheme, albeit with less stringent limits than called for under Kyoto.

Kurt Knaus, a spokesman for the Pennsylvania Department of Environmental Protection, called the initiative "a positive step" that "stops short of what is required." But he declined to explain why Pennsylvania is participating only as an observer.

The Bush administration, though, continues to oppose any free-market mechanisms for greenhouse-gas emissions.

The willingness of Europe and the rest of the industrialized world to incur the costs of curbing emissions -- even without participation by the United States, which puts out 25 percent of the world's greenhouse gases each year -- underscores the extent to which Europeans see climate change as a grave threat, in contrast to a far less certain view among some Americans.

After Hurricane Katrina devastated the Gulf Coast -- and after studies suggested that climate change could be making hurricanes more severe -- a Washington Post-ABC News poll showed that well under half of Americans refuse to believe global warming is occurring. But by contrast, surveys for years have shown that nine out of 10 Europeans consider global warming a serious threat that needs immediate attention.

"America is a young and optimistic country" that does not want to hear that it must change a lifestyle based on government-subsidized energy, said James Cameron, a founder of Climate Change Capital, a London-based green technology fund. "Europe -- older, more cynical and more prone to angst about loss of a glorious past -- has been more ready to accept the shockingly bad news about climate change."

Europeans, with their smaller cars, smaller homes, and more extensive mass transit, may be better-positioned than Americans to reduce emissions. High fuel taxes and motorists fees are already a fixture of European life. Britain is building a massive wind power generation system.

Although there is a minority of dissenters, the vast majority of scientists agree that human activity is causing the world's climate to warm. President Bush has resisted that view, but even his administration acknowledged in 2002 that man is the prime cause of global warming.

How It Works

The European Union's emissions-trading system:

The process: Each company has an emission target. If the company emits less greenhouse gas, it can sell its allowance. If it emits more, it must buy more allowances.

The goal: Capping emissions at 5,000 companies or power plants.

The target: Each company's target will be reduced in phases to reach the overall EU reduction desired.

Also see:

What's the Market Value of Polluting Your Atmosphere?

Carbon Emission Trading Can Bring Worldwide Benefits

Buying and Selling The Atmosphere

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