California Gov. Arnold Schwarzenegger is making his own global warming treaties nowadays. He and Britain's Prime Minister Tony Blair have agreed to set up a scheme modeled on the United Nations' Kyoto Protocol to reduce climate warming carbon dioxide emissions. In September, the Gubernator signed legislation that promised to reduce the Golden State's emissions back to their level in 1990 by 2020—a 25 percent cut of projected emissions. To do this, the state is supposed to set up a carbon trading scheme modeled on Europe's Emissions Trading Scheme in which CO2 emitters are issued emission permits and then allowed to trade them. Over time, the Bear Republic's Air Resources Board would screw down the number of permits to eventually reach the level of carbon dioxide emitted in 1990. The idea is trading a declining number of emissions permits will enable industries to figure out among themselves which ones can most efficiently reduce their emissions at the lowest cost. The theory is sound, but as the European Union is proving, practice is something else again.
Looking at the European experience, it turns out that in the initial allocation round in 2005, most European governments were very generous when issuing emissions permits. In the Kyoto Protocol, the EU agreed to cut its greenhouse gas emissions to 8 percent below its 1990 level. However, last year European governments handed out permits that were 10 percent in excess of actual emissions. The consequence is that CO2 emissions in the European Union have not declined. Eventually, the traders on the new European Climate Exchange noticed, the price per ton of carbon emissions essentially collapsed last spring. OK, perhaps that was just a hiccup at the beginning of trying to establish a new and complicated process—European governments will get it right on the second go-around.
Guess again. This past week, European governments sent in their proposed emissions permit allocations to the European Commission for the 2007 round. It turns out that they have allocated permits allowing emissions 15 percent higher than actual emissions. As EU environment commissioner Stavros Dimas lamented, "If member states put more allowances into the market than are needed to cover real emissions, the scheme will become pointless and it will be difficult to meet our Kyoto targets." Why would governments ignore their solemn treaty obligations in the face of what former U.S. Vice-President Al Gore calls a "climate emergency." Because governments hate to allocate pain while they like to hand out goodies. For example, this is why the Bush Administration and Congress are spending more money than the Feds take in taxes. Showering government largesse on constituents gets you reelected; increasing their taxes doesn't. Similarly, forcing companies to make expensive investments to reduce their greenhouse gas emissions that do not boost their profits causes election-risking pain.
In addition, governments succumb to the perennial temptation of trying to advantage their domestic industries at the expense of foreign ones. If Germans can get away with giving excess permits to their local guys that French companies have to buy to offset their emissions and that means the German corporations would get a double windfall. First, German companies would sell their permits to the French for extra cash and second, German fuel costs would be lower since they wouldn't have to buy permits themselves. This double whammy would give German companies a big economic advantage over their rival French competitors. Of course, French legislators and bureaucrats are not stupid and so they play the same game. The result is that most European countries are allocating permits in excess of actual emissions and that means that few if any companies have to pay for permits to reduce their emissions and the EU is far from meeting its Kyoto Protocol obligations. As the Economist put it earlier this week: "With so many allowances on the market, the price of carbon credits may well collapse and the carbon market fade away."
Of course, man-made global warming is a global problem. If European countries with well-developed institutions have difficulty in establishing an effective market in greenhouse gas emissions, think of how much more difficult it will be to extend such a market across the globe. The temptation and the ability of governments to cheat on their emissions allocations will be irresistible and enforcing Kyoto-style reductions will prove to be impossible.
Is there an alternative to greenhouse gas emissions markets? One suggestion is a global carbon tax. In his 2005 study, "Life After Kyoto: Alternative Approaches to Global Warming Policies" Yale University economist William Nordhaus outlines the advantages that such tax offers over Kyoto style trading schemes. Of course, a carbon tax is not a goody, but the pain it causes is more easily administered and monitored. First, the tax offers stability; governments, industries and consumers all see what the price of carbon based fuels will be. Second, it can be far more transparently administered across the globe. If a country fails to charge the agreed upon tax, other countries can boost their tariffs on exports from that country as a way to encourage it to join the global climate tax regime. Third, the tax can be adjusted over time to meet agreed upon global goals such as ultimate level to which to greenhouse gases should be allowed to accumulate in the atmosphere. And fourth, poor countries could be made exempt from the tax until the average incomes of their citizens reach some agreed upon level.
In any case, based on Europe's current difficulties, I predict that there will be no follow-on Kyoto Protocol-style global treaty and that California will never establish a market in greenhouse gas emissions.
Global warming heads up: I will be covering the United Nations' next climate change conference in Nairobi beginning on November 13.
Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.
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