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EU's Kyoto trading setup makes sense

Canada faces being the lone Boy Scout on the Kyoto accord on climate change. Blame Europe this time. Only five of 15 European Union countries met the March 31 deadline to submit plans to reduce greenhouse gas emissions. The setback means Kyoto, if not dead, is near comatose among the many countries that still allegedly support it. Too bad. Europe's market-based approach to carbon dioxide control made good economic and environmental sense.

With the EU's Kyoto campaign stumbling, the goal of launching a continental carbon dioxide trading scheme by 2005 looks decidedly ambitious. The EU's member countries were to assign carbon dioxide emission quotas to energy-intensive industries, such as electricity generators, oil refineries and steel mills. Companies that exceeded the emissions target would have to purchase a "credit" from companies whose emissions were below the target. Nice idea: The system would allow clean companies to make a profit, while forcing the dirty ones to pay a penalty. The goal was to reduce the EU's greenhouse gas emissions to 8 per cent below their 1990 level by 2012.

The EU's industrial lobbyists said the costs of meeting the goal would be ruinous. The Confederation of British Industry warned of "the sacrifice of U.K. jobs on the altar of green credentials." In the end, only Finland, Denmark, Ireland, Austria and Germany met the EU deadline to submit a quota plan. The only good news was that Germany, Europe's most industrialized country, was among the willing. If the Germans had balked, as they were expected to do, Kyoto would be a global goner.

It still may be. The United States refused to implement Kyoto. (Since then, it has also gutted the Clean Air Act, thank you George W. Bush, but that's another story.) Russia's on-again, off-again embrace of Kyoto seems off again. Meanwhile, two of the largest and fastest-growing economies, China and India, have been handed get-out-of-Kyoto-free cards.

In truth, Kyoto's chance of survival were 50 per cent at best the moment the United States opted out a couple of years ago. With the EU only one-third committed, its claim to global leadership on the issue is losing credibility. Unless the Europeans get their act together on Kyoto, they will be open to accusations that they never saw the accord as an environmental issue, but as a competitive one. If the United States had supported Kyoto, Europe, in effect, would have transferred industrial costs across the Atlantic. With the United States out of Kyoto, and Europe in, the reverse would be true.

As The Economist noted recently, the EU's faltering commitment to Kyoto has a certain irony. When the Americans were still part of the mix, they fought for a market-based system to meet the accord's targets; the EU, ever faithful to its central command roots, wanted no part of it. Now look at what's happened: The United States is out of Kyoto and the EU has promoted the market approach.

Europe has the right idea. There is no shortage of studies that conclude Kyoto's compliance costs would fall if countries and industries were given the option of trading carbon credits as opposed to being forced into a regulatory, emission reduction straightjacket. Texas, of all places, has taken a market approach to renewable energy that appears to be working. It has created a new commodity in the form of renewable energy credits that can be bought and sold on an exchange.

Electricity producers in some countries might find the cost of meeting Kyoto insignificant under a trading system. Utilities with access to renewable hydro power (as those in water-rich Manitoba and Quebec have) could build up a lot of carbon credits to sell on a carbon exchange. They could even make a profit if they built up enough of them.

Canada has officially endorsed Kyoto. But in the face of opposition from some provinces, notably Alberta, it has done little to ensure Kyoto's targets will be met. If the EU gets its act together -- a distant possibility given the poor showing last month -- Kyoto could still be saved. If the EU backs off, Canada would be Kyoto's only G8 supporter in the Western world. In other words, Kyoto would be dead and buried. The EU is taking the right approach with a market-based system. It's worth using it to give Kyoto one more chance.

Mea culpa: In a column last month, I said Sears Canada in 1993 had received an exemption on its pension plan solvency test, giving it the option of taking a contribution holiday. Sears was granted no such thing. My apologies.

ereguly@globeandmail.ca

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