The brighter side of $115 a barrel crude

How can high oil prices, which encourage more burning of a coal, be a good thing? The answer lies in the European Union's Emissions Trading System

By Andrew Leonard

Published April 16, 2008 10:39PM (EDT)

While George Bush attempts to distract the U.S. from doing anything substantive on climate change, an interesting thing is happening in Europe -- the price of carbon emission permits [EUAs] has hit a ten-month high.

The reason: high oil and gas prices.

The EU ETS is dominated by power utilities, which must hold EUA permits for every ton of carbon dioxide (CO2) emitted when burning fuel to generate power. Most fossil fuel generators burn either coal or gas. When the price of gas rises, it makes burning coal more economic. But burning dirtier coal means almost twice as much in CO2 emissions and the need to hold more emissions permits. Many generators switch to coal and then buy more EUAs to on the market to cover themselves.

This is exactly how it is supposed to work. The rising price of the EUAs provides an incentive for other companies to cut their own emissions and earn carbon credits which they can sell to heavier polluters. Or the ensuing scarcity of EUAs will force the price so high that the power utilities will have no choice but to invest in non-polluting energy sources.

The fledgling European Union emission tradiing system (ETS) received a ton of bad press two years, when the price of carbon emissions crashed. The E.U. had allotted far too many free "allowances" to heavy polluters to prime the trading pump, and when it turned out that several E.U. members weren't polluting as much as had been predicted, a surfeit of supply smacked right into minimal demand. But as I wrote back then, in Carbon Traders on the Ledge:

You can bet that the global warming skeptics and anti-Kyoto "free market" hard-liners are chortling.

They shouldn't be. If ever there was a case that demonstrated the meaning of the term "growing pains," this is it. The most obvious problem is that allocations were set too high. That can and will be fixed. National allocations were originally set partially in response to individual lobbying by various nations, a fact that generated a lot of criticism from environmental groups that are now having a hard time restraining themselves from saying, "I told you so." But the good news is that now there are some real baseline numbers to show how much pollution is occurring. That's a feature, not a bug. As one analyst noted, "price discovery" -- the process by which a market arrives at a value for a commodity -- is especially volatile when a market is in the early stages of its creation.

As of 2008, the rules have been tightened, and for the next phase of the ETS, beginning in 2013, the E.U. is proposing that there be no free allowances at all.

So maybe there's a bright side to all of the Bush administration's delaying tactics. By the time the U.S. Congresss finally gets around to legislating a cap-and-trade system, the European Union will have figured out how to make the scheme work.

P.S. Another explanation for Bush intransigence. Wired is featuring a high-resolution map of per capita CO2 emissions in the United States. California and the entire West don't look so good. But get a load of Texas!

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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