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Meanwhile, politicians also opened the door wider to so-called carbon offsets, which allow companies to meet their emissions-­reduction commitments by financing rainforest conservation, renewable-energy investments, and other low-carbon projects in developing countries.

European industrialists argue that offsets make both economic and environmental sense, since climate change is global. The problem is that to the extent that offsets slacken demand for EUAs, they weaken the price signal that the carbon market is supposed to send to investors in Europe’s energy sector and industries. The price signal will be further compromised by a new mandate, endorsed by European leaders in December, that requires 20 percent of Europe’s energy production to be met through renewable sources by 2020.

No surprise, then, that some economists, as well as some experts in the power industry, advocate making adjustments to the emission trading system. Corrective measures under debate include a lower cap, tighter limits on offsets, or even a mandated floor price. Whatever the solution, many argue that the trading system will need to be significantly strengthened. “The ETS is not as tough as it needs to be,” says Michael Grubb, a visiting professor of climate change and energy policy at Imperial College and chief economist at the U.K. Carbon Trust, which advises business on low-carbon strategies.

What is especially disappointing is that even as the Europeans seek to undo many of the features that have made their carbon-trading system weak and dysfunctional, legislators in Washington seem determined to repeat their mistakes. Representatives Henry Waxman (D-CA) and Edward ­Markey (D-MA) introduced energy legislation built around a cap-and-trade system this spring, with the same concessions to carbon-intensive industries that neutralized the EU’s trading system.

The U.S. bill, as it stood at press time, proposes to cut emissions to 17 percent below 2005 levels by 2020–essentially taking the U.S. back to (rather than much below) 1990 levels. And, as with Europe’s trading system, a mix of offsets and renewable-energy mandates threatens to further undermine the carbon price. Analysts project U.S. carbon prices at a meager $15 to $20 per ton in 2020–barely a 10th of the price called for by the IEA.Most allowances, meanwhile, will be distributed without charge, despite the risk of windfall-profit taking and perverse market incentives. That move will also deprive President Barack Obama of revenues needed to fund the $150 billion, 10-year program of clean-energy R&D outlined in his 2010 budget proposal.

The prevailing wisdom among supporters of the Waxman-Markey bill is that Congress, wary of putting energy-intensive industries at risk, won’t pass anything stronger. Best to get a carbon price established in the U.S. economic system now, supporters say, and tighten the system later. But this cap-and-trade scheme could be weak enough to send a dangerously wrong signal to financial markets looking to invest in new energy technologies. If you have any doubts about that, just take a look at the EU.

Peter Fairley is a freelance environment and energy writer based in Paris.

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Credit: Epanchincev Evgeniy/ITAR-TASS/Corbis

Tagged: Business, Energy, greenhouse gases, carbon dioxide emissions, cap-and-trade, carbon trading

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