In 2007, members of the European Union agreed to reduce carbon emissions by 20 percent by 2020 and by 40 percent by 2030, as compared to 1990 levels. Legislation to reach these targets followed in 2009 and the European Trading System (ETS) was established as the main instrument to help EU member states achieve these goals. The ETS is Europe’s version of a cap-and-trade system, which sets a ceiling as a benchmark for the total greenhouse gas emissions that sectors covered by the ETS are allowed to produce. A market-based solution, such as cap-and-trade, is widely considered to be one of the most effective ways to incentivize greenhouse gas emission reductions.
In late February, however, the 30 companies that make up the German Dax 30 stock market openly voiced their concerns regarding the German government’s current strategy to meet carbon emissions reduction goals. The Dax 30 identified some of the major shortcomings of the ETS, such as the fact that it does not include some of the largest polluters. Focused on the power, manufacturing, and aviation sectors, the ETS only covers 45 percent of the total amount of carbon emissions in Europe, while leaving out some of the main culprits such as road transportation and agriculture. National measures designed to address emissions from non-ETS sectors, have not been successful in achieving the desired reductions. According to recent calculations, road transportation alone is responsible for about a fifth of all carbon emissions in Europe. These shortcomings have drastically lowered the ETS’s overall effectiveness, and resulted in Germany failing to meet its national goal of reducing emissions by 40 percent by 2020.
Experts argue that a carbon fee placed on non-ETS sectors, would strongly enhance the speed with which reduction targets are achieved, and the Dax 30 agree. Major companies, including Lufthansa, are pushing for an economy-wide price on carbon to gain more transparency in their decision-making processes, especially in terms of investment into green technologies. From an economic standpoint, investing in renewable alternatives makes sense when one is presented with sufficient disincentives to continue fossil fuel use.
A lack of national restrictions on carbon-intensive sectors may also lead to a failure by German companies to meet the emissions standards of other nations. German companies could therefore face unexpected costs. National legislation implementing a fixed carbon price would make it easier for companies to incorporate potential future costs into their strategic planning from the very beginning. Within an international landscape that continues to demonstrate an increasing interest in utilizing carbon pricing as a mechanism for reducing emissions, a fixed carbon price would create a certain reliability of expectations.
The current insufficiencies of the ETS have also spurred German politicians to make carbon pricing part of their electoral platform.The Free Democratic Party, for instance, calls for an expansion of the ETS to other sectors, which the party hopes would eventually lead to a global emissions trading system.
However, In February, EU member states released a strategic reform plan for the the ETS that does not foresee such an extension, rendering it highly unlikely for this scenario to become a reality. As unforeseen price fluctuations have left the European emissions market without enough incentives to sufficiently reduce carbon emissions even from sectors covered by the ETS, France is already pushing for a regional minimum price on carbon emissions for the power sector. If France’s initiative proves to be successful, EU member states may realize the emission reduction potential of a fixed carbon price and decide to implement it for non-ETS sectors as well.
In the meantime, other cap-and-trade systems are coming under similar criticism as the ETS.The Regional Greenhouse Gas Initiative (RGGI), a partnership among states in the US Northeast and Mid-Atlantic , is another example for a cap-and-trade system that surely lives up to its potential, but not to its creators’ highest hopes. Continuously celebrated for its success, RGGI’s coverage is limited to the electric sector and emissions from sectors such as transportation and agriculture remain beyond its reach.
The pitfalls of the ETS carry important lessons for RGGI states. Cap-and-trade will not yield the desired results when there are no concomitant strategies in place to address emissions from other sectors. There are two options: one is to expand the reach of cap-and-trade to sectors such as transportation and the other is to introduce a fixed carbon price as a fee on emissions. Both strategies would lend increased efficiency to the fight against carbon pollution and help states achieve their climate targets in a timely fashion.
JULIA RITTERSHAUSEN, POLITICAL RESEARCH FELLOW
Julia recently graduated from UMass Amherst with a Master’s degree in Political Science. She received her BA in Political Science and Italian from the University of Heidelberg, where she worked at the Heidelberg Institute for International Conflict Research. Julia discovered her interest in environmental politics while studying at UMass.
In her free time, Julia loves to listen to her favorite tunes, play music herself, spend time with friends, go for long hikes, and travel.
