The Lessons of Europe’s Carbon Trade

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.

More importantly, the cap on emissions is being tightened over time – by 11% for the second period, from 2008 through 2012, and by 1.74% annually from 2013 on – so that the required reductions will increase in the future. While it is impossible to prove that firms have reduced emissions at least cost, the necessary conditions for doing so exist.