| Abstract: |
The European Union's Emission Trading Scheme (EU ETS) is the world's first
multinational cap-and-trade system for greenhouse gases. As an agreement
between sovereign nations with diverse historical, institutional, and economic
circumstances, it can be seen as a prototype for an eventual global climate
regime. Interestingly, the problems that are often seen as dooming a global
trading system - international financial flows and institutional readiness -
haven't appeared in the EU ETS, at least not yet. The more serious problems
that emerge from the brief experience of the EU ETS are those of (1)
developing a central coordinating organization, (2) devising side benefits to
encourage participation, and (3) dealing with the interrelated issues of
harmonization, differentiation, and stringency. The pre-existing
organizational structure and membership benefits of the European Union
provided convenient and almost accidental solutions to the need for a central
institution and side benefits, but these solutions will not work on a global
scale and there are no obvious substitutes. Furthermore, the EU ETS is only
beginning to test the practicality of harmonizing allocations within the
trading system, differentiating responsibilities among participants, and
increasing the stringency of emissions caps. The trial period of the EU ETS
punted on these problems, as was appropriate for a trial period, but they are
now being addressed seriously. From a global perspective, the answers that are
being worked out in Europe will say a great deal about what will be feasible
on a broader, global scale. |