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Cap-And-Trade Still A Work In Progress

Capandtrade

By ARTHUR MAX   04/ 6/11 05:39 AM ET   AP

LIXHE, Belgium -- In these days of concern over global warming, a cement factory in southern Belgium is abandoning coal and moving to more unorthodox fuels: old tires, plastics, sewage sludge, city garbage, ground cattle bones.

The result is less carbon dioxide wafting from the smokestack – and in Europe, less carbon is worth more cash under a much vaunted EU scheme that allows industries to swap CO2 pollution rights just like any commodity.

So, has cap-and-trade actually dented Europe's greenhouse gas emissions?

Views vary, but an evaluation today shows that the system has so far delivered more promise than results. But gradually, most analysts say, it is changing the way Europeans manufacture goods, produce energy and conduct business.

"It was not built to revolutionize our economy. It was meant to give impetus to long-term change," said Hans Bergman, a top official of the European Commission on Climate Action, the European Union's executive arm that drafts policy to fight climate change.

"It takes some time to create bigger things," Bergman told The Associated Press.

Europe has been attacking climate-changing pollution for 20 years, and boasts it has done more than any other economy to slash its greenhouse gases. By 2010 emissions were 17 percent less than the international benchmark year of 1990, and are easily on target to meet the EU commitment of a 20 percent reduction by 2020. If Europe boosts its energy efficiency, that decade-ending figure could even reach 25 percent.

Six years ago, stepping up the pressure on its heaviest polluters, the EU launched cap-and-trade, meant to compel power plants and heavy industries to reduce emissions – or make them pay. The European Trading Scheme, or ETS, covers about half of all emissions, with the rest coming from cars, houses, and the routines of daily life.

About 12,500 individual factories or power plants are given a set number of emission rights. They are supposed to receive fewer allocations than they need, driving them to invest in carbon-saving technology. Those that pollute more than allowed can buy credits from industries that emit less and have permits to spare.

Since then, carbon dioxide, an invisible, almost intangible waste product, has come to be traded like copper or corn futures. Last year more than $120 billion in pollution allowances changed hands through banks, traders and commodities exchanges. One credit, representing one ton of CO2, averaged about euro15 ($21) until Japan's nuclear disaster drove the price above euro17 ($24).

The result: Industries covered by the scheme are emitting 11 percent less carbon than in 2005, while production levels have climbed back to 98 percent of 2005 levels after a bruising two-year recession.

Point Carbon analyst Kjersti Ulset said that means pricing carbon is having a positive effect. "Emissions are increasing less than production ... and because of that we can see the ETS is working," she said by telephone from Oslo.

But critics say planning flaws, coupled with the 2008-2009 recession that slowed industry's pace, has stripped the system of much of the incentive to go green. The economic downturn, they say, is the real reason for the cleaner skies.

Oscar Reyes, of the Barcelona-based nonprofit group Carbon Trade Watch, said the system is merely directing funds to the wrong places. "It hasn't really reduced emissions," he said. "It has pushed money in the wrong direction and actually acted as a subsidy for the heaviest polluters."

Rather than feel a financial bite, some companies – including some of the worst polluters – are making windfall profits. Power companies were given free carbon permits, but they raised electricity fees anyway – as if they had paid the market price for their permits – and pocketed the markup. Many companies were allocated too many allowances, often the result of powerful industries lobbying the governments that give the permits.

"Overallocation, yes, that's a problem," said Bergman. "From the next phase the allocation will be more restrictive."

After 2013, free allocations will be sharply reduced, forcing companies to pay for their permits, and fewer will be distributed.

But companies can save against that day. They don't have to sell leftover allocations, but can "bank" them to use or sell in future years, allowing them to further delay carbon-reduction measures.

Many companies acknowledge that the downturn and fuel costs had more impact than energy innovation.

"In terms of being a driver for us to change our behavior, the answer is yes – but not as much as intended," says Ian Dobson, a carbon trader for Heidelberg Cement. "The bigger factor was the recession."

The factory in Lixhe, one of about 50 Heidelberg installations under the ETS, is an example of how the system works.

It began looking for cheaper fuel alternatives years ago, after the oil crisis of the 1970s, long before a price was put on carbon emissions.

Now, rather than pay for coal, Heidelberg gets paid for disposing of rubbish.

About 3,000 old tires are shoveled daily into the kiln of its factory in Lixhe. At another plant in Maastricht, 10 kilometers (6 miles) across the Dutch border, a crane grabs a claw-full of stuffing – a mixture of paper, shredded plastic, carpet threads and other textiles, for its oven. Nearby, a grinder prepares animal and bone meal to feed into the kiln, along with sewage sludge trucked from cities all over the southern Netherlands.

"CO2 is having quite an influence on our strategy to deal with alternative fuel," says Jan Theulen, the company's sustainability manager, who is always looking to increase the biomass component and further cut the CO2 content.

Because they were early to convert to low-carbon fuels, the Maastricht and Lixhe plants normally emit less than permitted. The Maastricht facility has an annual allowance of 716,000 tons, but emitted 528,000 tons in 2010.

It's up to people like Dobson, Heidelberg's Brussels-based trader, to make the most profit of that excess.

"It all depends on the price now and what your expectations are. Everyone's been saying for years the market is tightening and the price is going up to euro30 or euro40, but it hasn't," he said at a trader's meeting in Amsterdam.

Lotta Fogde, vice president of the Swedish mining company LKAB, says her energy-efficient company sought to lower its fuel bills, but not because of cap-and-trade.

"I wouldn't say that so far it has fueled so many investments that we wouldn't have made anyway," she said. "The price of CO2 has not been decisive so far," although it is a factor in long-term planning.

However, Jos Cozijnsen, a Dutch consultant on emissions trading, argues that the price of carbon has spurred many industries to action. For example, Dutch power company Essent keeps a daily chart showing the cost of coal, gas, and CO2 to help it decide what fuel is cheapest at any given time. Shell, Europe's largest oil company, diverts CO2 waste from a hydrogen factory to farmers' nearby greenhouses.

"If there were no premium for CO2 or penalty, then they would not have done this," he said.

Environmentalists say the process is not moving fast enough to avert the trend of a warming world.

The rule-makers at the European Commission "don't understand the nature of the crisis we're in," says Sanjeev Kumar, of the environmental watchdog E3G. Kumar says cap-and-trade should work, but only when companies are truly squeezed to emit less.

"We now have all the key bits of architecture in place," he said. "You just need to tighten the cap."

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Filed by Travis Donovan  |