Transatlantic Carbon Trade

New York Times

Out of Brussels comes word that the European Union wants to work with the United States to lead a cap-and-trade emissions system for wealthy nations. A well-implemented cap-and-trade system has the perks of providing an absolute maximum for the traded emissions, and of taking advantage of the efficiency of the competitive market equilibrium (the CME is always in the Core, to put it technically). In short, an ideal cap-and-trade system allows for fully effective environmental regulation within the market system, rather than throwing the baby out with the bath water.

Unfortunately, the EU plan previously has been the model of how not to implement a cap-and-trade system. Individual countries would routinely demand vastly overinflated quotas so that they would not have to make an effort to actually restrict emissions. The New York Times says however, that word out of Europe is that they are well on their way to improving the system:

European officials have acknowledged that the European Union’s emissions trading system has had a rocky start. But they say it has become more effective following a pilot phase, which ran from 2005 to 2007.

European Union governments approved further measures late last year aimed at reducing the scope for lobbying by governments and industry that diluted the effectiveness of the system during the pilot phase.

Perhaps the Obama administration could help to work out the kinks even more so. It would be a fulfillment of his promise to reduce emissions that contribute to global warming, and to do so in an economically sensible way. If nothing else, this is an acknowledgement that nations must begin to work together to regulate carbon emissions. It will be interesting to see however if China, India and other rampant polluters can also be brought to the table in some way, in the next few years.


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