MIT Report: World Can Learn From European Cap-And-Trade System

July 4, 2008

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The EU cap-and-trade system has operated well and has had little or no negative impact on the overall EU economy, according to an MIT analysis.

Despite the quick adoption and unsure start of the European system, which operates internationally and is larger than either of the U.S. programs for SOx and NOx, it is “far more than any other nation or set of nations has done to control greenhouse-gas emissions — and it works surprisingly well,” according to A. Denny Ellerman, senior lecturer in the MIT Sloan School of Management.

“I think the EU ETS has a lot to tell us about how a global system might actually work,” Ellerman says.

According to the report, Europe’s system shows that

The economic effects — in a macroeconomic sense — have not been large;
Permitting “banking and borrowing” will make a cap-and-trade system work more efficiently; and
Even though the process of allocating emissions allowances is going to be contentious, cap-and-trade is still the most politically feasible approach to controlling carbon emissions.

Large cities like Tokyo are passing legislation that will require a cap-and-trade scheme for emissions. 1,300 of the biggest polluters there that are responsible for 20 percent of emissions in the capital city. Still the G8 climate change talks July 7-9 are not expected to result in anything more than a “large rhetorical statement” about reducing emissions worldwide.

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