If it becomes necessary to manage climate threatening greenhouse gases on a global scale, what might that management system look like? MIT economist Denny Ellerman says that he has a pretty good concept of how it might work — and that it wouldn’t necessarily involve anything like what people think about when you mention global environmental controls.
Ellerman, an MIT Sloan School senior lecturer, recently spent a year in Europe. It gave him the chance for a close look at the European Union’s approach to climate protection, and he came away generally impressed.
The core of the system is a market where you can buy or sell the right to pollute — but only so long as you and your fellow emitters stay under a pre-selected overall cap on the target pollutant, CO2.
“In Europe,” says Ellerman, “the total limit on CO2 emissions has been set at 2.5 billion tons for the 25 EU-member countries.” He adds that that cap doesn’t include cars, stores, or indeed any CO2-emitting entity that produces less than 20 megawatts thermal of power a year — a rule that limits coverage to fossil-fuel burning electric plants and larger industrial facilities. Those heavy emitters, though, must participate.
What does that mean? Your plant gets an initial set of “allowances,” which entitles you to put out a pre-selected amount of CO2 a year. If you exceed your limit, you have to buy allowances from others or face a steep penalty. If you under-emit, you can sell your extra allowances.
The EU and its member governments do have a role. For example, they oversee the exchanges — essentially, electronic trading systems that make it possible for the emission allowances to be bought and sold — and the emissions audits companies undergo. But compared to traditional government regulation, the system’s remarkably hands-off.
“The key difference,” says Ellerman, “is that the overseers of the system aren’t telling the companies what to do. They’re saying, ‘Here are these chits, and whatever else you do, make sure you have enough chits to match your emissions.’”
Though the system’s less than two years old, Ellerman says the early returns are encouraging: some firms and countries are admittedly unenthusiastic, for example, but all 25 EU countries have signed on. And though CO2 prices have jumped up and down, there’s evidence the system’s providing a meaningful incentive to reduce emissions.
“It appears emissions are only a few percentage points below what they would have been without the system,” notes Ellerman. But he adds that the fact natural gas prices, until recently, have been higher than normal (natural gas being the main alternative plant owners turn to when seeking to cut CO2 emissions) “suggests the system has been more constraining than raw numbers might indicate.”
But could such a system function planet-wide? If designed with great care, argues Ellerman, “you can well-imagine a trading-based system for CO2 that works on a global level.”