What’s that you say? Kyoto is working?

European trading system offers lessons for U.S. lawmakers to ignore

At Worldchanging, Eric de Place takes a look at the success of the European cap-and-trade system in reducing emissions:

The EU’s cap-and-trade program was, indeed, highly imperfect. It relied on inaccurate estimates of emissions, it distributed too many carbon permits, and it distributed permits in a way that conferred windfall profits on polluters. But here’s the kicker: it still worked! The ETS is ironing out its flaws and a future US program stands to benefit from Europe’s lessons.

Yes. Back in the day, some people (me! me!) did have the courage and foresight to note that the problems with ETS, though real, were perhaps not as bad as critics suggested. Some of these problems, such as the overallocation of permits, were by their nature self-correcting. Over time, the tightening cap removed the slack from the system, just as it was designed to do.

Other problems — in particular, the giveaway of allowances to polluting entities — reduced the economic efficiency of the trading system, but did nothing to undermine its environmental integrity.

Most of this was fairly easy to predict. However, some of the lessons of the ETS were harder to see in advance:

4. GDP impacts are small

Recommendation: Don’t let concerns about macroeconomic impacts dictate the environmental targets, Economic impacts have been consistently less than projected.

…

6. International competitiveness impacts are limited to a small number of industry sectors

Recommendation: Concerns about competitiveness impacts should focus on a few potentially exposed industries. For these, tailored solutions should be pursued.

The U.S. should learn from the European experience, of course, but for the most part, we won’t. Our legislation will be shaped by domestic considerations and the need to forge compromise with domestic interest groups. That said, the Waxman-Markey bill does represent an improvement over the original European system, and the current Senate bill also so far looks like an improvement. Perhaps the most important feature of any cap-and-trade bill is enough built-in flexibility that the system can be tweaked as experience is gained.