The EU Emission Trading Scheme: Prototype of a Global System?

Harvard Univ., Belfer Center / by A. Denny Ellerman
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[Abstract] The European Union’s Emission trading Scheme (EU ETS) is the world’s first multi-national cap-and-trade system for greenhouse gases. As an agreement between sovereign nations with diverse historical, institutional, and economic circumstances, the EU ETS can be seen as a prototype of an architecture for an eventual global climate regime. Although any future global system is likely to be very different from the EU ETS, there are still many similarities that allow this pioneering policy experiment to be instructive for the larger and more difficult task ahead. Interestingly, the problems that are often seen as dooming a global trading system — international financial flows and institutional readiness — haven’t appeared in the EU ETS, at least not yet. The more serious problems that emerge from the brief experience of the EU ETS are those of (1) developing a central coordinating organization, (2) devising side benefits to encourage participation, and (3) dealing with the interrelated issues of harmonization, differentiation, and stringency. The European experience suggests that over-arching agreements may not be enough for creating an effective limit on emissions and an accompanying trading system. A central institution that educates, coordinates, and facilitates would appear to be essential, and the commitment of at least some nations may need to be reinforced by some side benefit. The pre-existing organizational structure and membership benefits of the European Union provided convenient and almost accidental solutions to the need for a central institution and side benefits, but these solutions will not work on a global scale and there are no obvious pre-existing substitutes. Furthermore, the EU ETS is only beginning to test the real world practicality of harmonizing allocations within the trading system, differentiating responsibilities among participants, and increasing the stringency of emissions caps. The trial period of the EU ETS punted on these problems, as was perhaps appropriate for a trial period, but they are now being addressed seriously. From a global perspective, the answers that are being worked out in Europe will say a great deal about what will be feasible on a broader, global scale.