A few years back, Europe’s cap-and-trade system, called the ETS, was taking a beating in the press. Some of the criticism was legit: the program really did make some silly missteps in the early years.
The biggest bungles were tied up with how the ETS handed out emissions permits. First, they decided to give them out for free—which, aswe’vediscussedad nauseum , was a recipe for windfall profits for the firms that got free permits. And second, for lack of reliable emissions data, the ETS handed out more permits than firms actually needed. Ultimately, the glut of permits led to a collapse in the price of carbon, and very little progress in reducing emisisons.
But the good thing about making a mistake is that you can learn from it. And that’s just what the ETS has done. To fix the windfall problem, nations participating in the ETS have begun auctioning off permits, rather than handing them out for free. And now, there’s evidence that the ETS has really begun to reduce emissions. The New York Times reports:
In a boost for the system….a prominent research company, New Carbon Finance, said its calculations showed that the largest cause of a reduction in emissions in the European Union last year was attributable to the trading system—because it had encouraged greater use of gas in power generation rather than dirtier fuels like coal.
European emissions dropped by roughly 3 percent in 2008.
So it took a little while, but Europe’s cap and trade system is having the intended effect: by putting a price on carbon emissions, it’s made a meaningful dent in climate-disrupting pollution.