Linking the European Union’s emissions trading scheme with a U.S. cap-and-trade scheme will be difficult and require adjustments on both sides, EU market participants said on Friday.
Analysts say linking the EU’s scheme (EU ETS) with the United States is a crucial first step toward a global carbon market, which will help achieve real emissions cuts in planet-warming greenhouse gases.
“The idea of a global cap and trade system … and global carbon market compatibility is pretty far-fetched,” said Paul Kelly, head of environmental markets at JP Morgan. “We will see some linking, but it’ll take time.”
The European Union’s executive Commission hopes to have a global carbon market in which emissions trading schemes are linked by 2020. It wants to see national schemes in all OECD countries by 2013 and for those to be linked by 2015.
The EU Commission’s goal is feasible if work begins now but the main problem will be in building a mutually compatible system, experts said.
“It is at least feasible but I don’t know whether it is achievable,” David Corregidor, deputy director of environment and climate change at Spanish power utility Endesa said at a carbon conference in Barcelona. “We have to work on defining the common elements of the schemes.”
The EU ETS began in 2005 and forces energy-intensive industries to buy permits to emit greenhouse gases such as carbon dioxide, which is produced from burning fossil fuels.
Despite being an older scheme, the EU ETS will still have to adapt to make itself compatible with the United States.
“The law-making is not the problem. The most time consuming thing will be setting the infrastructure, monitoring, exchange platforms and getting the contracts in place,” Emmanuel Fages analyst at orbeo, told Reuters on the fringes of a carbon market conference in Barcelona.
Other obstacles to linking include the presence of price caps in the U.S. market but not in the European one, defining what kind of trading unit will be used and differing emissions reductions targets.
The United States aims to cut greenhouse gases by 17 per cent below 2005 levels by 2020 and by 83 per cent by 2050, while the EU has opted for cuts 21 per cent below 2005 levels by 2020 and 80 per cent by 2050.
U.S. policymakers worry about losing the ability to regulate the costs of its cap-and-trade scheme if it joins another.
“The biggest obstacle is the lack of control over costs. Once you link systems the ability to moderate prices goes out of the window,” Nicholas Bianco, associate at U.S. environmental think tank World Resources Institute, told Reuters.
Linkage is “in a sense an after thought” as policymakers focus on getting the future system to work, he added.
On the European side, the recent price volatility in the EU ETS could be another hurdle to linking in the near future.
Prices for carbon permits called EU Allowances fell from more than 30.00 euros last July to an all-time low of 8.05 euros in February due to a sell-off by industrial companies to raise cash in the economic slowdown.
“The (EU) carbon market is too volatile and we need trillions of dollars to pour into energy markets for them to work. It’s practically a joke,” Seb Walhain, head of environmental markets at Fortis Netherlands, said.
Rather than linking the schemes, there should be more focus on producing more clean energy locally through government-led enforcement programs, to drive real emissions cuts, he said.
Emerging regional emissions markets could also be more effective at cutting carbon dioxide levels as they would likely be more constraining than any climate change deal agreed by world leaders in Copenhagen in December.
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