Avoiding Europe's Carbon Trading Missteps

(page 2 of 2)

Auctioning is expected to curtail these windfall profits, and will be expanded to more than 60% of the European trading scheme by 2020. "Europe realized free allowances distorted how the carbon market worked," says Olivier Lejeune, an analyst at consultants (New Carbon Finance) in London.

The steps will help create what energy-intensive companies desire most: long-term CO2 price stability. Knowing that carbon emissions will carry a stable, and stiff, price, makes investments in low-carbon technologies or energy efficiency more economically competitive and less risky. "To make capital-intensive investments, companies need less [price] volatility," says Colette Lewiner, global energy, utilities, and chemicals leader at consultancy Capgemini (CAPP.PA).

For sure, the Europeans still haven't fully cracked the art of carbon trading. Critics say the main benefactors have been financial players such as Britain's Barclays (BCS) or Goldman Sachs (GS), which actively trade CO2 credits. Others question whether the European scheme has even led to reductions in overall greenhouse gases.

Here to Stay

But there's no question the European scheme has been vastly improved, and that the U.S. is learning from the EU's mistakes. However, according to Andreas Arvanitakis, a senior analyst at Point Carbon in London, Congress still has a ways to go. While the proposed U.S. legislation doesn't create too many permits, it does hand out 85% of allowances for free—a key problem that Europe has now solved. "Many of the concessions made [in the congressional climate change bill] just haven't been consistent with ideal cap-and-trade regulation," Arvanitakis says.

Supporters of the U.S. plan argue that this isn't as bad as it sounds, since consumers, not industry, are the main beneficiaries of the free permits. For instance, while the bill does hand out 30% of the permits to regulated utilities, the permits don't go directly to the actual electricity generators. Instead the permits go to the companies that distribute the electricity. Those so-called local distribution companies are under strict orders to return the value of the handout to customers to help the customers cope with higher energy bills.

Problems remain, but with global leaders putting their weight behind cap-and-trade, carbon trading looks like it's here to stay. To harness market forces to tackle global warming, Europe's initial missteps—and its moves to correct them—should help the U.S. cuts its carbon footprint.

Return to the Copenhagen Climate Change Summit Special Report Table of Contents

Scott is a correspondent in Bloomberg Businessweek's London bureau.

Business Exchange

Track and share business topics across the Web.