Europe has seen tremendous activity in the development of renewable energy as a response to climate change. As a result, some of the most important renewable energy firms operating in the U.S. are based in Denmark, Germany, and Spain. Stable, high-level policy is one reason Europe dominates this sector.
Over the past two years I have been collaborating with a German colleague to compare how the U.S. and Germany support renewable energy, trying to understand why the two countries have such different policies and what they can learn from each other. One thing we’ve learned: Sometimes the policies that get the most media coverage don’t have the biggest impact. Take cap and trade.
The limits of cap and trade
The European Union (EU) has a cap-and-trade system, an effort to limit greenhouse gas (GHG) emissions by issuing emission permits and allowing trading in those permits. Environmentalists criticized the initial round of permitting because the EU gave away the permits and put so many of them into circulation that the system had very little effect on energy prices. Not surprisingly, utilities had little incentive to shift toward renewable energy.
Europeans are now in the midst of highly contentious negotiations on the next round of cap-and-trade rules and limits, with various sectors arguing for exemptions, grandfather clauses, and other concessions. It’s impossible to predict the end result of these negotiations, but it’s clear that various industries are resisting a cap-and-trade scheme that will significantly raise energy prices.
Despite these difficulties, the EU will likely meet its Kyoto Protocol obligations, but not because all EU countries have reduced emissions. At the time of the Kyoto negotiations, the EU had only 15 countries. Since then, it has added 12 more, most of them former Warsaw Pact nations, all of which saw their economies collapse and their emissions decline after the Soviet Union broke up — around the time of the Kyoto agreement’s base year, 1990. Hence, those countries, such as Bulgaria and Hungary, are well below their Kyoto emissions goals, so when you add together the emissions of all 27 EU countries, the region as a whole is meeting its Kyoto target. But it is unclear how much lower emissions can go if these countries only use regulations to force them down.
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