Europe keeps cap intact

Europe hammered out a deal on Friday to continue forth with its plans to make moderate cuts in carbon emissions over the next decade. The mass of compromises and concessions have left partisans of all stripes with plenty to complain about, but fundamentally the original agreement seems to be limping forward intact.

Observers in the media are also starting to pay deserved attention to the question of how pollution permits are doled out under a cap-and-trade system. Hopefully they’ll someday stop conflating this issue with the bigger issue of whether the cap itself is tight enough, because the recent articles on the climate treaty in Europe seem unnecessarily dour.

For example, the New York Times recently wrote this about the tortured negotiations over the next phase of the E.U. emissions market:

> E.U. regulators say that polluting companies should buy all of their permits starting in 2013 in order to cut emissions and drive innovation — that is, to make the greenhouse gas market work as it should.

In truth, the question of whether permits are sold or handed out for free is fairly tangential to the larger goals of cutting emissions and driving innovation. Fundamentally, if the cap is tight enough (meaning both low and non-leaky), then emissions should drop accordingly. The greenhouse gas market will “work as it should.”

How the permits are divvied up remains an incredibly important issue, but for other reasons: namely, efficiency and fairness. Efficiency means, roughly, the cost of the cap-and-trade system to society. Fairness refers to the question of who bears those costs. It’s worth teasing out these issues at greater length in some future posts, but if you’re dying to learn more now, this report from the Congressional Budget Office gives a highly readable account of the policy tradeoffs involved in allocating emissions permits.

The European legislators who reached a new climate accord on Friday just got an up-close look at those tradeoffs — and the frenzy of lobbying that attends any discussion of permit allocations. Although the resulting compromise is a painful muddle that is neither particularly efficient nor particularly fair, negotiators did hold firm on the cap itself: 20% emissions cuts by 2020.

It’s reasonable to ask whether this goal is aggressive enough (doubtful), but it doesn’t seem fair to say, as the New York Times did, that the treaty has been “defanged.” In the midst of a massive economic crisis, Europe has charted a course through some rocky water, balancing the interests of countries with very different income levels and fuel mixes, and managed to keep the overarching environmental goal largely intact. What happens next in Europe will depend in large part on climate policy in the U.S. Let’s hope that the Obama administration is learning from other countries’ somewhat fumbling progress.

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