The European system cover the largest polluters in the 27 member states and regulates roughly half of all emissions. Each of the member states then comes of with their own "cap", and decide how many "credits" to issue each polluter. The cap is the total amount of emissions a country is allowed. This figure is determined by the Kyoto protocol and the EU decides each individual country's share. Developing economies such as Greece and Spain are still allowed to increase their emissions while powerhouses like Germany and England take a lot of the burden.
The credits each represent 1 ton of CO2 and each company is issued a set amount based on their assigned limit. This limit slowly declines over time. At the end of each year, companies must verify their emissions (something the United States does not have a system for) and have the required amount of credits to match this total. Every ton over is a 100 Euro fine to the government for 2008.
Companies are free to buy and sell their credits in an open market. Like all true markets the price of a credit is determined by supply and demand. Companies that are under their cap can sell their excess credits to companies over the cap. In theory, companies are driven to lower their emissions for financial incentives and the dirtiest polluters are forced to lower their emissions of take a hit. Initially the program was working and a credit peaked at just over 30 Euros a piece. It soon crashed to just a few Euros as companies began to realize their was a major glut of credits and caps were set too high. Another problem is the trouble in accurately measuring emissions for so many polluters. This is basically left up to the installation itself and you could only assume they will be generous in their estimates. (EU review on first round of cap and trade system)
The United States seems destined for a cap and trade system, albeit slightly different than the European model. Im basing this on what the candidates have stated their plans are. The first step in this is creating a cap and getting a system in place to measure emissions. Unfortunately esteemed Commander in Chief George Bush's new budget cut all $3.4 million planned to create such a registry (see my post below), so we are speaking in hypotheticals until hop along George is out of office.
Our candidates (more) want a cap and trade system where all or the vast majority of credits are auctioned off to companies. The government would set an industry-wide cap and companies would decide how many credits they want. The price would be determined by demand and the revenue generated could be used for new environmental programs (or Super-nukes). While a good idea, here is what I think will happen:
An overall cap will be set that will not lower emission requirements enough due to pressure for various industries. Still, companies will slightly panic when it comes time to buy credits because they never had to deal with an emissions cap. Companies will overestimate what they need and the price will spike upwards. The government wins initially but soon the market will start to drop as companies settle down. By the end of the first cycle credit prices will be rock bottom.
This will be a make or break moment for the system. If the government still gives into industry influence for another year and makes the cap too light, credit prices will be dirt cheap from the start and the system will do little to curb emissions. If the government learns from the previous year and further decreases the cap, companies will be forced to overcompensate once again and a lot of revenue will be generated. Will a McCain or Obama or Clinton withstand pressure from the industry lobby? Will we have ANY carbon measurment program in place? Is this for real? Stay tuned.
European Union production explaing their cap and trade system:
McCain talks cap and trade system and climate change:
Obama talks cap and trade:
Hillary Clinton talks her cap and trade (audio only):
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