Lessons from the EU ETS Conference on Climate Change Policy Denny Ellerman Center for Energy and Environmental Policy Research Massachusetts Institute of Technology Conference on Climate Change Policy Eagleton Institute, Rutgers University March 26, 2010 Massachusetts Institute of Technology Center for Energy and Environmental Policy Research

The EU ETS: A Recap Classic cap-and-trade covering large sources About 45% of EU CO2 emissions 27-state multinational CO2 trading system Hybrid implementation of Kyoto Protocol Trading and non-trading sectors Decentralized cap within a cap with CDM linkage 2005-07 trial period, 2008-12 second period, and post 2012 periods

The Broad Lesson Largely confirms US experience with cap-and-trade for conventional pollutants CO2 is not that different A CO2 price will not “wreck” the economy Useful learning and borrowing for U.S. and global design No basis in EU ETS experience for not adopting cap-and-trade approach in the US

Re-affirms US Experience It works (much better than alternatives) Emissions are reduced (in line with the cap) Markets emerge effortlessly (to facilitate trading) Costs are reasonable (€46/person/year) Few of feared side effects (trade, economy…) Sub-prime mortgages in US have bigger effect than CO2 price in Europe One price among many others that matter

Lessons for US Design Borrowing is OK Long horizons from the beginning Primary cost containment in US proposals Long horizons from the beginning Not discrete compliance periods Upstream accountability for small sources Instead of costly downstream reporting Cap-setting and free allocation require good emission inventories of included sources

Lessons for Global Design Trial periods have value for building trust and requisite institutions/experience Some central coordination will be required Appropriate differentiation is difficult but feasible (East/West problem in EU) Club benefits will also be needed Institutional readiness and cross-border flows are not problems

The EU ETS: A Recap An efficient and effective instrument for reducing GHG emissions Not perfect, but better than anything else around More than any other country/region has done A useful laboratory for US and global design Nothing to dissuade others from following