The bureaucrats that run the European Union's day-to-day business aren't known for taking risks. Yet back in 2005, when they devised the EU Greenhouse Gas Emission Trading Scheme [EU ETS], these pencil pushers gambled that a cap-and-trade scheme would help cut the EU's carbon dioxide emissions. Now, three years on, the environmental benefits from the EU ETS remain unclear: The continent's CO2 output actually rose 1.1% last year.
Moreover, its impact on the European economy is far from clear. Optimists think Europe's early adoption of a cap-and-trade CO2 market will give local companies a competitive advantage when other regions of the world finally start trading carbon. Under the EU ETS, companies are given a set number of carbon allowances [the "cap" in cap and trade], which then can be bought and sold on the open market. In theory, this provides a financial incentive for firms to become more energy efficient, giving European businesses a head start in cutting overhead just as fuel costs begin to hit company profits.
This goal will be put to the test ahead of next year's U.N.-backed meeting in Copenhagen to negotiate a global agreement on climate change. For Europeans, the summit holds particular importance. The continent has banked its financial future -- and moral authority -- on creating a low-carbon economy. This gamble's efficacy now depends on the likes of China, India, and the U.S. deciding whether to embrace carbon trading. "Copenhagen will play a big part in showing that Europe's creation of a cap-and-trade carbon market will pay off," says Mark Spelman, global head of strategy at consultancy Accenture (ACN).
Steeper Energy Prices Loom If, however, a global agreement for CO2 isn't reached, many energy-intensive industries reckon their European businesses will be the only one to shoulder the higher costs needed to cut emissions. The extra financial burden eventually could send European jobs overseas and increase costs there.
A global agreement on carbon is even more urgent for European companies after Brussels outlined stricter CO2 cuts [BusinessWeek.com, 1/23/08]. Based on unilateral carbon reductions of 20% by 2020 [rising to 30% if other countries agree to similar reductions], the cap-and-trade agreement is expected to double the cost of offsetting a metric ton of carbon, to $63 by the end of the next decade. That equates to a roughly $15-per-megawatt-hour increase in electricity prices as energy firms pass on extra CO2 costs to end-users, according to Britain's Carbon Trust, a government-backed research-and-advisory group.
With the tougher cuts coming into force from 2013 onwards, companies have little choice other than to increase energy efficiency, according to Karsten Neuhoff, a senior research associate at the University of Cambridge. European utilities already have invested billions of dollars in wind power and solar energy to move away from fossil fuels.
