New book by MIT Sloan lecturer calls European Union’s attempt to limit greenhouse gases a success

CAMBRIDGE, Mass., March 1, 2010 — The European Union’s Emissions Trading Scheme – the first attempt by any group of nations to establish a hard limit on greenhouse gas emissions – was a success, according to a new book, "Pricing Carbon", coauthored by MIT Sloan School of Management former senior lecturer Denny Ellerman. Studying the scheme’s “trial” period from 2005-2007, he found that despite several problems, emissions were ultimately reduced and a mechanism was put in place for more ambitious reductions over time.

“Europe has done more than any other group of nations to put in place an effective limit on greenhouse emissions and a lot of other countries like the U.S. are closely watching how this plays out and debating whether to set up similar systems,” he said. “This book is a reference for what happened under this type of trading scheme, the problems that arose, and what worked in this significant public policy experiment.”

Under the European Union’s trading system, a set amount of permits were distributed for free to companies for the emission of greenhouse gases. As those gases were emitted, the companies surrendered their permits and then either had to purchase additional permits from companies willing to sell their unused permits at the market price or find ways to reduce emissions. Companies that emitted greenhouse gases without the proper permits were steeply fined.

“In the three-year trial period, the reduction of emissions accomplished was between 2% and 5%, which is a modest amount,” noted Ellerman. “However, the technology to make large-scale reductions is still being developed and over time greater reductions will be required under this system.”

Ellerman and his coauthors found that in addition to the decline in emissions as a result of the carbon price, the reductions came through cost-effective methods and did not impact the location of companies. “A lot of people are concerned that cap-and-trade systems will cause companies to move offshore where there is no carbon price, which can create unemployment. But in our study, those effects were imperceptible. There are a lot of reasons that factor into where plants are built and a carbon price is evidently not a very important one,” he said.

Another benefit of the trading scheme, according to Ellerman, was that it created an incentive to use natural gas over coal. He estimated that 50% of the reduction in emissions was from electric utilities increasing their usage of natural gas plants. He credited the other 50% in reductions to changes in industrial processes in plants that make materials such as cement, iron, steel, glass, ceramics, and paper.

“Many of those reductions in the industrial sector aren’t easy to track because they are made through low-level maintenance and energy conservation measures, but when all of those emissions were measured and required costly permits, the companies found they could cut emissions for less cost than buying more permits,” he explained.

Ellerman added, “Overall, the trading scheme was a success. It reduced emissions by every measure we could devise and, more importantly, put in place a mechanism to effect further emissions reductions over time.”

"Pricing Carbon", which will be published this month in English and French, is the result of an international research project with experts in the U.S. and Europe. Coauthors include Ellerman, Frank J. Convery of the University College Dublin, and Christian de Perthuis of the Université de Paris IX (Paris-Dauphine) with contributions by Emilie Alberola, Barbara K. Buchner, Anaïs Delbosc, Cate Hight, Jan Keppler, and Felix Chr. Matthes.

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