March 1, 2009

Carbon Goes Subprime

Dr. Robert Peltier, PE, Editor-in-Chief

Collateral Damage

Why should the U.S. be interested in the EU carbon market? As worldwide stock and money markets operate 24/7, so will the carbon market. Just days after his inauguration, President Barack Obama was called on by Brussels to establish a joint carbon trading scheme modeled on the ETS. Stavros Dimas, the EU environment commissioner, is pushing for a global carbon market by 2020. He characterizes the Copenhagen meetings scheduled for late this year, which are to produce a successor agreement to the Kyoto Protocol, as our "last chance" to negotiate a united approach to controlling global warming. Dimas has produced a draft policy white paper that suggests that a 30% reduction in 1990 levels of carbon emissions by 2020 will cost developed nations a cool $225 billion a year.

I won’t be surprised if carbon cap-and-trade legislation were debated by Congress this year. However, I see few reasons why the U.S. should consider adopting the ETS approach given its recent market gyrations. Also, the chances are nil that any proposed U.S. carbon trading scheme will be as generous as the EU’s in its initial distribution of allowances. That disparity would put U.S. businesses at a disadvantage from the start.

The political fallout from a global carbon market would be palpable. How does the president convince voters that shipping boat loads of money to the EU is good for the U.S.? This undesirable situation would occur regularly when our industries grow faster in good times, have a dearth of allowances, and would be obliged to purchase allowances from EU firms that will continue have more than they need. That’s a stimulus package we should avoid.