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Wanted: more flawed climate legislation

Andrés Jonathan Drew

Thursday 29 July 2010

Voltaire famously stated that "the best can be the enemy of the good" and this is certainly true of climate policy, which is in desperate need of flawed legislation.

Several countries, including the US and Australia, are failing to set a carbon price for fear of regulatory failure: the idea that no laws are better than flawed laws. However, in the context of climate policy, the EU's emissions trading scheme (ETS) provides a case study for why this simply is not true.

Andres DrewThe most important lesson that policymakers can learn from the ETS is how to lock in climate policy. After all, the ETS is now at the core of EU climate policy. When, last week, the environment ministers of France, Germany and the UK called for a tougher EU mitigation target for 2020 – a 30 per cent reduction in carbon dioxide emissions from 1990 levels – they were not just expressing an ambition, but were also placing significant faith in the ETS.

Making climate-change laws is inevitably messy. But, like sausages, laws are best enjoyed without knowing how they are made. Emissions trading, for all its failures, has an internal logic that converts foes into friends and can be improved over time. In phase one of the ETS, the European Commission gained electricity generators' support by granting them free permits; phase three now requires generators to acquire 100 per cent of their permits at auction. Thus, the Commission has slowly transformed a system that initially gave generators windfall profits.

Energy-intensive industries – such as the cement, steel and paper industries – have recently flexed their muscles, fearing the outsourcing ('carbon leakage') of their activities to 'carbon-friendly' jurisdictions. Their displeasure was quelled when the Commission granted them free permits. Importantly, though, these permits come with strict benchmarks and review clauses.

The ETS will eventually require all sectors to buy 100 per cent of their permits. In the process, opponents will have been converted into supporters, with vested interests in the system's longevity, since carbon will have been turned into a commodity that they own. This means that European policymakers are now in a much better position to optimise the system than their US or Australian counterparts, who are starting with a blank slate in an unfavourable public environment.

But what has the ETS actually achieved for Europe? There has been some abatement – although less than expected because the permit price has been too low and volatile. Thankfully, the centralised permit allocation process in phase three will reduce the risk of over-allocation. That, combined with member states' carbon taxes, should correct these problems.

Some of the achievements are relative and there is evidence that the EU has benefited from its first-mover advantage. There has been a great deal of learning and capacity-building. This has translated itself into the development of highly coveted financial and policy expertise located in London and Brussels, but also of significant manufacturing and technological capabilities outside these centres. Indeed, the EU still has the largest share of the world market for low-carbon and environmental goods and services, at 22 per cent, still above its 20.6 per cent share of global gross domestic product. The ETS has also driven member states to adopt some of the world's most ambitious climate mitigation and adaptation policies. Despite being left out of crucial negotiations at the UN talks in Copenhagen last December, most EU countries therefore maintain significant soft power in this domain.

So, rather than wait years for an opportunity to legislate, policymakers in Australia and the US can adopt flawed laws comfortable in the knowledge that, if the ETS is any indication, they can institutionalise and optimise emissions trading in the medium term by paying off opponents in the short term. This, surely, is better than endless promises to legislate, while their societies continue to burn carbon like there's no tomorrow.

This article first appeared in European Voice|  [opens in new window] -  subscription required.

Andrés Jonathan Drew is a researcher in the law department of the London School of Economics and Political Science and at the Met Office Hadley Centre.

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