The Lessons of Europe’s Carbon Trade

The EU has demonstrated that a multinational cap-and-trade scheme can reduce carbon-dioxide emissions at least cost, and that the economic side-effects are not serious. Whatever the system's flaws, these lessons are the important ones to keep in mind.

FLORENCE – As the Cancún climate change summit approaches, discussions about the viability of carbon trading systems is intensifying. The world can look to Europe as a model that is not only up and running, but that works.

In 2005, the member states of the European Union became the first to create a cap-and-trade system covering roughly half their CO2 emissions. They remain the only countries that impose a price for carbon upon a significant part of their economies. With the EU’s Emissions Trading Scheme (ETS) half-a-decade old, three broad lessons can be drawn. 

First, the system works. The ETS has achieved its objective of reducing emissions by the required amount at least cost. Emissions have been reliably estimated to be 3-5% lower in the ETS’s first three years, owing to the carbon price. This is a modest amount, but the initial ambition was also modest.

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