How the European system works very wellD

Energy news: How do you consider the emission permits trading system implemented in 2005 in the Union

Denny Ellerman: Should first clarify that Europe has introduced the system of quotas in the world, and it is also the first with the CO2 component. From the point of view of the policy against the greenhouse effect, what did Europe, may be considered repeat it elsewhere. There is much to learn of the functioning of this market - in particular whether it will turn as the US SO2 market. And I already that the European system works very well. I am surprised that this is the case so quickly, because of delays in its implementation. Three or four years ago, it was not uncommon to meet people that said you: "It's a dream to do it in Europe and the start of 2005." However, the 25 Member States are in the system. As seen in many other areas that they are not agree...

E.n.: How the European system "works very well"

D.E.: First, there is a market price of carbon, and it is the key to be able to trade. Having a single, variable price of course but that is the same in Poland, Spain, the United Kingdom, or France, this is the beauty of these markets. Because the idea of this regulatory system is to let businesses decide what they want to do with their emissions, according to the market price. In addition, even if there were difficulties, successfully allocate quotas in all countries. Certainly, there is still progress to be made, such as verification of the data transmitted by the Member States - but this is a fairly easy to settle technical question. And then, we saw an unexpected price, which reached 30 euros per tonne before relapse at 10 euros, and it is not known yet what effect it has on business...

E.n.: This high volatility is not evidence that the market does not work so well that it

D.E.: But prices in markets are never stable, fluctuations are part of the life of a market! If you want a fixed price, should introduce a tax, a tax. I do not think that the volatility is a major problem. It is in the nature even markets - be they oil, coal, gas, or wheat. On the other hand, one might ask if volatility perhaps excessive, Yes. The award is a representation of the scarcity - here, from emissions quotas. It has therefore declined when the first announcements of countries fell because they were saying that emissions were lower than forecast (8). The same thing happened to the United States with the market of SO2. Whereas the tonne was $ 150, the publication of the statistics of the second quarterly report of 1995 established that emissions were much lower than expected (9). The price is down by half, to $ 70, in the months that followed - it has therefore not been as sharp as in Europe. The question now is whether if this gap between expectations and achievements is due to an over-allocation of allowances or emissions reduction greater than expectations. In the United States, it was not an over-allocation, the global quota allocated corresponding to half of the previous emissions. It had therefore made more cuts than was expected. Thus, ex post, it has been said that industry had obtained reductions to which they did had not thought before. And this, because of quotas and price - i.e., in this market.

E.n.: And Europe, with the 2005 report published last week (10), can be said if there was allocation error or reduction (or even increased in some countries) higher than expected CO2 emissions

D.E.: Should first emphasize that, overall, have 2.5 gap between what countries had announced and that they have actually achieved, it is rather not evil - even if you notice large deviations for some (11). Will as to the reason for the differences, the be, perhaps, that after in-depth studies. I believe that, for those who are "long (12)", the two have played: over-allocation and decrease emissions. Can be in any case surely predict that in the discussions to come between Member States, industry and electricians to one side, Commission of the other, the first will say that there was no over-allocation but they have carried out activities to reduce emissions - and therefore that they should not be punished with a lowering of their authorization to issue for the next period... The Commission will examine the NAPs (13) each and make the adjustments taking into account the 2005 statistics, but this will not be the only element of appreciation. And it already clearly stated that, on the 2nd 2008-2012 period, no country can have a total of quota higher than on the 1st period 2005-2007 (14).

E.n.: Twenty-five have requested an amendment to the directive, and more visibility (15). In the matter, the short duration of the quota - three and five years in Europe, while they are thirty years on the US market for SO2 - is it a problem

D.E.: Yes, this can be a problem. And, for the period post-2012, when the European Union does will be more constrained by the Kyoto Protocol, talking about quotas on ten or fifteen years. Over their lifetime will be long, more confidence will be high on investors... who already need to know whether this system will continue after 2012.

E.n.: Denounce the negative effects of market cap on electricity prices in France, industrial...

D.E.: First, there is no way a carbon constraint without having an effect on prices. Say that it will not cost, it is not possible. Second, the correlation is much more between prices of electricity and gas between prices of electricity and the ton of carbon (16). By listening to all that said, one would think that the price of electricity in Europe are high carbon prices, as if it was not a barrel of oil at $ 70, with its effects on the price of gas! Even without this system of quotas, the price of electricity would have mounted...

E.n.: Industry would have also preferred a taking account of their specific emissions and global (17)...

D.E.: I know this argument. They want a system of relative cap while here has a system of absolute cap. I think especially the industrial is not familiar with this form of regulation where the price is anonymous, so they do not like. You have a tendency in Europe to conclude voluntary agreements. However, in the case, it negotiates just the quantity of allowances, and then is the market that operates. The United States, the industrialist who wants more than allowed to buy, that which is needed not even sell!

E.n.: in reality, they find this system of emission permits binding...

D.E.: Yes, it is binding, because the society in which they evolve think that there is a problem with the greenhouse effect and therefore decided to compel CO2 emissions. If they had given as much emissions they wanted for production but with a very low-emission (by applying therefore relative cap system, Editor's note), they would not have been

All right. In all countries of Europe, industrialists have obtained all quotas that they need for their business, and they are electricians who were "short (18). In this manner conducted by considering what industry who are facing an international competition with companies not having this carbon constraint, non-electricians. And also thinking that they can more easily reduce their emissions than industrial. I am not sure this is an appreciation of things, but this is what the policies decided. Then, I do not find that industrialists have been ill-treated from the point of view of the allocation of quotas.

E.n.: Some have yet said that this quota market may kill industries such as cement or steel, and even deindustrialize Europe (19)...

D.E.: It is an exaggeration. There will probably be effects, but many other cost factors intervene in cement and steel, as labour and transportation markets. And, on this second point, $ 70 per barrel of oil, the benefit is for Europeans. Perhaps that cement types will be produced elsewhere - and those that move will ensure that it is the carbon prices then it is not him who will make the difference. But to claim that you are going to de-industrialise Europe is obviously not very serious! The Americans, they are them at a disadvantage on the Europeans paying more expensive gas. But you hear never talk about it...

E.n.: What do you think of the fact that CO2 highly emitting sectors such as transport, residential, agriculture, are not affected by the system of emission permits

D.E.: Other measures aim these areas - although it can sometimes doubt their effectiveness. When it will be found that the quota system successfully reduce emissions in the industry, it may be considered to extend it to other sectors. And I hope that this will be the case, because if he must fight the greenhouse effect, cannot do everything based on large firms and power plants.

E.n.: At a Conference (20), you mentioned the "happy scenario" would be the reproduction of the European market in other parts of the world, especially in the United States...

D.E.: I think that the European market will make school. The question of a carbon constraint is in discussion at the United States, where industrialists fear anything that might constitute a burden overwhelming for the economy - what would have been the Kyoto Protocol. The idea would be to build on what Europe, with a market similar to yours within a period of five to ten years. For example, (Republican, Editor's note) Senator McCain, who is candidate for the 2008 presidential election, would favour a carbon constraint. However, the European system on CO2 is almost a copy of the U.S. market of SO2, in force since 12 years. And it is a great success. It is almost invisible and SO2 emissions plummeted - almost two-thirds...

E.n.: And other countries such as China or the India

D.E.: If the United States applied market of quotas, it would be a great first step. Then, could engage in global diplomacy. The issue of China and the India is somewhat like the Poland and the Czech Republic, who agreed to be part of this binding system while they are not subject to mandatory emissions (21). But it is the price to pay to enter a larger economic system, where also share the work, the capital. As a ticket for entry into the club. The Romania, which is however not yet member of the European Union, will also submit its NAPs to the Commission. This axis East-West in Europe can become a North-South axis in the world. See what interest the China and the India had to enter the WTO, which imposes constraints, standards! It was the condition for European and American markets.

E.n.: The seminar you have conducted in Paris (22) addressed the issue of "social and ethical" aspects of emission permits market. I.e.

D.E.: This is the question of who has the right to hold licences to emit CO2. Some are immoral to exchange such emission permits - they call also "rights to pollute." But today, as well to the United States that in Europe, I hear this much less than five years ago. I think that not bad of environmentalists have seen that the quota system will allow more emissions than all the other means already used. To condition obviously does not stop after 2012. A Harvard University Professor Michael Sandel, questioned on what are the limits of the market, that it is not moral to bargain, exchanging. This is a philosophical question. For example, it does not sell a right to vote. But CO2, it is the waste of a production process, and it can and must do something. The problem is then in the mode of allocation of permits. Who has the right to pollute This is a fundamental question that all companies face.

E.n.: It is also a case financial, speculative...

D.E.: This is true. And we saw last month people build on a price per ton of carbon which would continue to rise beyond the 30 euros and who may have lost much if they took a long position that they can't get out...

specialist economist of emission permits market, Massachusetts Institute of Technology (MIT)

8. On 15 may, the European Commission has published reports from 21 of the 25 Member States (see note 1) on the CO2 emissions of installations covered by the emissions trading system. Overall, these emissions are 2.5 lower than forecasts of national plans for the allocation of quotas (NAPs).

9. The U.S. market of SO2 was born in 1995. The publication of these statistics therefore intervened, as for the European market of CO2, in the phase of startup of the system of exchange of emission permits.

10 See note 8.

11. For example, the Lithuania, the Finland, the Czech Republic and the France show lower emissions respectively of 42, 26, 15 and 13 in their forecasts. While the United Kingdom and the Spain have issued 16 and 12 more than their forecasts.

12. See note 2.

13. See note 3.

14. The Commission had initially announced that the quotas for the period 2008-2012 must be at least 6 lower than in the previous period. It has however not confirmed this figure in introducing the report of 2005 emissions.

15 At the Energy Council of December 2005, Member States have asked the Commission to "revise" the emission trading system to make it "more efficient by taking into account the need to promote the competitiveness and supply of energy at an affordable price." On 15 may, the French Minister of industry François Loos requested an amendment of directive allowances "to limit the effect of the potential increase in the price of CO2 on the market."

16 See curves p. 9.

17 See energies news no 97/98, 10-11.

18. See note 2.

19 See energies news no 97/98, 10-11.

20 Conference on CO2 price, University of Paris Dauphine, January 19, 2006.

21. The Kyoto Protocol specifies that countries "which are in transition to a market economy (have) some flexibility in the implementation of their commitments (of their emission reduction)". The Poland and the Czech Republic, with others, are in this category.

22 See note 7.