The European Union likes to think itself a global green leader—a kind of trailblazer for environmentally-friendly policymaking—and to that end, it created a carbon trading scheme to disincentivize greenhouse gas emissions. So far, that Emissions Trading Scheme (ETS) has failed to produce a high enough price of carbon to make much headway, largely because planners over-allocated carbon permits and exempted a number of the trading bloc’s most energy-intensive industries from the constraints, in an attempt to prevent firms from fleeing to less-regulated shores. The NYT reports:
[I]ndustry lobby groups [have warned] that manufacturers, threatened with having to pay more for emitting carbon dioxide in Europe and under pressure from global competition, would shift their most polluting operations elsewhere — an avoidance strategy known as carbon leakage.Safeguarding against carbon leakage, according to industry lobbyists, is necessary not only to protect jobs and investments, but also to avoid transferring greenhouse gas emissions to countries with environmental regulations that are more lax.
Carbon leakage is a real concern. As a first-mover in this endeavor, the EU runs the risk of pushing heavy industry out of the bloc and into the developing world, where regulations are more lax. If and when that happens, the EU will have hurt its global competitiveness (at a time when its economies are far from healthy) without actually reducing emissions—they will have merely relocated the source of those greenhouse gases. To that end, the EU delineated a number of exemptions to its ETS, and in fact, last month expanded that loophole:
The leakage list is revised every five years, most recently this year. This year’s revision, adopted by the European Commission on Oct. 27, expanded the number of industrial sectors allowed relief from carbon trading costs to 175, from 164.
There’s no easy fix to this, not when the EU’s carbon market remains regional. If Europe reduces exemptions to raise the price of carbon high enough to do some good on the greenhouse gas front, then businesses will simply pack up and move. If it continues down the path it’s currently on by exempting heavy emitters from the program (exactly the kinds of industries that this kind of solution was meant to tackle), then the system loses any power its planners might have envisaged, becoming a green policy tool in name only.