EU vs. U.N.: Carbon Showdown

Normally the U.S. is first in line to tick off the United Nations, but this time it’s the European Union that’s threatening to disrupt a U.N. program. The EU, as part of its recently revamped framework for reducing emissions, has threatened to severely limit trading of Certified Emission Reduction credits (CERs) after 2012 if a successor to the Kyoto Protocol that broadens carbon markets, mostly to include the U.S. and China, is not agreed upon. CERs are issued as part of the U.N.’s Clean Development Mechanism (CDM) program, which allows developed countries to outsource their carbon reductions to the developing world. Currently the EU’s Emission Trading Scheme (ETS) is the only place they have any monetary value.

This shakeup could actually strengthen the world’s nascent carbon markets by forcing the U.N. program, which has been heavily criticized by the WWF, to evolve or die. More consistent and reliable carbon trading will make abatement costs more dependable, a much-needed development for cleantech companies.

There are two ways this might play out. The carbon-emitting world — notably the U.S. and China — could agree to a framework that goes beyond the Kyoto Protocol, whereby they join the global carbon trading market and give carbon a ubiquitous international value. The U.S. and China, the two largest carbon emitters, would want to keep the CDM in place as it would let them buy their way out of being forced to reduce their emissions.

Having all the major carbon players participate would force the UN to shore up the CDM and ensure that money paid to abatement projects was actually reducing global emissions. This would open up opportunities globally for cleantech innovation as CERs would be a reliable international currency.

The other potential scenario would be one in which the U.S. and China continue to refuse to sign an international agreement and the EU sheds the U.N.’s questionable CERs, making the ETS stronger and giving a boost to various cleantech projects and opportunities in Europe. The U.N.’s CERs are the dominant way to get global credit for abatement in the developing world, so as the EU members look to reduce more carbon, they will focus on projects at home.

Either way, this showdown will force carbon trading to start to seal up some of its international loopholes. The ETS is by far the world’s largest and best regulated carbon market. In 2006 the ETS traded 1.1 billion tons of carbon credits while there were some 475 million tons of CERs traded. (In contrast, a meager 10.3 million tons of carbon were traded on the domestic Chicago Climate exchange that year.) If the ETS blocks CERs from the market, countries will have no incentive to participate in the CDM as the CERs they earn will effectively be worthless.

Stabilization of the cost of carbon would be good news for cleantech startups as uncertainty around the cost of emitting has given a lot of industries cold feet, most recently America’s banks. While the U.S. is still waiting for the next President to cap or tax carbon in America, Europe is moving ahead to stabilize its own carbon markets. As carbon trading grows, renewable energy will become cost competitive as the environmental cost of coal power is folded into the average Joe’s, or Jacques’s, utility bill.

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