10 Things Europeans Can Teach Us About Addressing Global Warming

by U.S. Rep. Jay Inslee

In the race to tame global warming, our friends across the pond have taken the lead right out of the starting gates. But watch out Europe, Americans are gaining momentum and soon could take the lead on climate-change policy.

On June 26, the U.S. House of Representatives approved the American Clean Energy and Security Act of 2009 that includes implementation of a market-based or “cap and trade” solution to cut carbon pollution. The bill will be sent to the U.S. Senate for their consideration later this year.

The premise behind a cap and trade program is to force an overall reduction in pollutants by setting a limit, or cap, on emissions and tightening it over time. Polluters must either reduce emissions below the set cap or purchase emission credits from facilities that don't use all their allowances. Allowing polluters to trade credits, provides a built-in flexibility mechanism that lets the market select the most cost-effective and efficient ways of achieving the emissions reductions required under the cap. The first cap and trade system was instituted in the United States during the presidency of George H.W. Bush to reduce emissions of pollutants that cause acid rain. In 2005, the European Union (EU) enacted its Emission Trading Scheme, the largest carbon trading scheme in the world to date.

As Americans move on an energy package, cap and trade, and other global-warming policies, we need to take stock of Europe 's aggressive approach to climate change. That's why I traveled with fellow lawmakers to Germany , Denmark , Belgium and the United Kingdom , where we met with almost 100 officials including those in the European energy industry and members of the European Parliament.

Here are 10 of the most important things we can glean from the European experience:

1.

The various energy policies Europe has adopted have created several dominant clean-energy industries in Europe . Europeans believe that their energy policies have utilized the “first to market advantage” strategy of countries that have successfully developed cutting edge technologies. The German feed-in tariff system, which guarantees producers of renewable energies a fixed price for their electricity, has resulted in Germany dominating innovation in solar energy and has allowed them to capture 20 percent of the world's renewable energy market. Denmark 's wind power strategies allow it to produce 19 percent of its energy through wind. This is attributable in large part to the Vestas Corporation, which now employs 130,000 people in six countries including a plant in Colorado . Europeans see their energy policies as being as much about economic opportunity as a necessary response to global warming.

2.

Europeans stressed one fundamental tenet of their experience: the application of the cap and trade system to regulate greenhouse gas emissions, in itself, will be grossly inadequate to achieve stated goals. They repeated that it is necessary to put into place complementary policies to inspire the development of new technologies in order to meet their goal of a 50 percent reduction in global carbon-dioxide emissions by 2050. They were adamant that while the carbon price signal set by the cap and trade system will help encourage investment, it will fall far short of what is needed.

For instance, Europeans stressed that their taxes on cars and trucks is equivalent to a price on carbon at $300 per ton. If this price were set by market forces with a cap and trade system rather than a government-set tax, however, these prices likely would be only $20 to $40. In other words, no cap and trade system can create an adequate economic incentive to effectively drive all necessary technology advances in transportation. Therefore, Europeans stress the necessity of other policies, such as requirements that a certain percentage of the electricity mix comes from renewable energy sources, green building standards, requirements that utilities purchase electricity at a guaranteed rate from renewable energy installations, as well as automobile efficiency standards. Europeans currently are considering automobile efficiency standards of 42 miles per gallon. One of the country ministries stressed that while the cap and trade system had reduced emissions by 50 million tons, other measures have resulted in a reduction of 100 million tons.

3.

Europeans stress maximizing energy efficiency strategies as the highest priority, both because they have proven effective and because they can be exercised in the short term. Strategies range from the development of buildings in Sweden that are so efficient that they will be warmed by the body heat of the occupants and waste heat of their appliances, to the daily use of public transportation and bicycles by two-thirds of commuters in Copenhagen, to the use of combined heat and power co-generation facilities that double the efficiency of power plants. America 's current power plants waste one half of all the energy they could produce by venting waste heat into the air. Europeans are developing plants that produce electricity and use the waste heat to warm their homes and offices, thereby cutting carbon-dioxide emissions from fossil fuel plants in half. They do so by building attractive and relatively small power plants amidst their new developments and heating those developments with what would otherwise be waste heat. 

4.

Europeans believe that the trial period for their cap and trade system has been a success and is worthy of strengthening and continuing. They believe that the system has already achieved improvements and has the capacity to achieve significantly more. This has been achieved without damage to Europe 's economic growth. The system is broadly supported across every part of the EU's geographic spectrum. There are no current efforts in Europe to dismantle the system.

5.

During the trial period of 2006 to 2008, Europeans have identified several weaknesses in their cap and trade system, which they are attempting to correct. The three fundamental flaws were the over allocation of emissions permits, the creation of windfall profits for regulated utilities and a lack of banking for permits. a) Europe originally allocated too many carbon dioxide permits. This resulted in a failure to establish the desired scarcity in the carbon market and consequently a crash in the price of carbon permits. This over allocation resulted from two causes: first, the Europeans had faulty data upon which they based their original allocation, in part, due to industries fudging their data before going into the system. Second, the Europeans attempted to have a very light touch in order to build support for the effort. This situation is in contrast to efforts in the U.S. , which are based on a good data set going back to 1990. b) In the early stages of the cap and trade system, European utilities reaped enormous windfall profits, in large part because they were granted all of their emissions allowance permits for free. The logic of free allocation is that the polluters may use the value of the free credits to help reduce the economic burden associated with new regulations. However, during the application of this system electricity prices rose throughout Europe in part because the utilities still charged their customers for the “opportunity costs” of not selling their free permits into the carbon market. Thus, they enjoyed windfall profits as a result of the give away of permits. The utilities were able to do this because of the lack of the regulatory oversight in Europe coupled with the significant consolidation which has occurred in their industry. C) The price of carbon had dropped virtually to zero at the expiration of the trial period because permittees were not allowed to bank their permits into the next period. The Europeans will allow banking in the second and third rounds of the allocation process, which will eliminate that problem.

6.

Retail electricity prices rose in Europe concurrently with the initiation of the cap and trade system. Since there were several dynamic forces, including rising gas prices and consolidation in the industry affecting the energy market at the time, an effort to determine if any of these price rises were attributable to the cap and trade system have proved to be an inexact science. Estimates range from ascribing a 2 percent rise due to the cap and trade program, an opinion offered by the Sweden-based Vantenfall Company, to an estimate of 10 percent suggested by the U.K. economic Ministry. All commentators agreed that considerably less than half (probably one third) of the price rises were attributable to the cap and trade system.

7.

In establishing the framework for the cap and trade system, Europeans went to considerable lengths to reduce the prospects that the system could inhibit the competitiveness of their heavy emitting industries. They did so by issuing a disproportionately large number of permits to industries, such as steel and cement, and a disproportionately small number to utilities. This reduced any possible competitive disadvantage to emissions-intensive industries.

8.

Europeans identified no companies that had left Europe as a result of the cap and trade system; nor did they believe that the initiation of cap and trade has or will cause an exodus of investment from Europe . However, one industrial representative cautioned that there could be less interest in future investment in European heavy-emitting industries if there is a wholesale failure to act on restraining carbon emissions from other countries. One commentator suggested that European unilateral willingness to act on carbon would not be infinite in the absence of action by the rest of the world.

9.

Europe has demonstrated that it can achieve significant gross domestic product (GDP) growth while saving energy. GDP growth in Europe has risen 70 percent since 1980 while energy consumption has remained flat through 2005. Europeans believe that they will experience economic growth while achieving the Kyoto target of a 20 percent reduction in carbon emissions. They reported that the projected gap before the adoption of the cap and trade system of 13 million tons will be closed by the target date.

10.

Europeans recognize the need for second generation biofuels and are conducting considerable research towards developing cellulosic ethanol. For instance, the Biogasol Company in Copenhagen has discovered a “super bug”: a bacteria from the hot springs of Iceland that allows production of ethanol with an efficiency Biogasol claims is the highest in the world.

Overall, learning about the European experience of addressing global warming left me feeling optimistic. I'm optimistic because efforts to cut carbon-dioxide emissions in Europe have presented economic growth opportunities with relatively small costs; engendered widespread consensus on the importance of adopting a cap and trade program in conjunction with other measures to significantly reduce greenhouse-gas emissions; and, spurred the creation and development of green technologies.

We're all in the race to tame global warming. The stakes of winning are high: the economic opportunity of leading the world in the clean-energy revolution, and more importantly, the health of our planet. American lawmakers have our work cut out this year as we move forward on landmark energy and global warming legislation. It would behoove us to study the playbook of our European counterparts as we plan our strategy for victory.

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