US v. EU Carbon Strategies 2001-2008

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Carbon Mitigation: The U.S. VoluntaryApproach vs. the European Emissions Trading

Scheme

Andrew CollierCarlos RymerHao Zhuang

Kubilay Kavak

Spring, 2007NTRES 431: Environmental Strategies


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Table of Contents

Introduction3

The U.S. Voluntary Approach3A. Overview......................................................................................................3B. Advantages...................................................................................................5C. Disadvantages...............................................................................................7

The European Emissions Trading Scheme.8A. Overview......................................................................................................8B. Advantages...................................................................................................8C. Disadvantages.............................................................................................11

Discussion.13A. Comparison of Approaches........................................................................13B. Recommendations......................................................................................14

Conclusion.15

References.16

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Introduction

Global climate change, which is being driven by greenhouse gas (GHG) emissions

around the world, is largely attributable to human activities. Increasing temperatures have

raised global sea levels; decreased the extent and thinned the thickness of Arctic sea-ice; forced

the widespread retreat of non-polar glaciers; decreased global snow cover; thawed and degraded

the permafrost in many regions; intensified El Nio events; shifted plant and animal ranges;

extended the spring and fall seasons; increased coral reef bleaching; and increased economic

losses globally.1 These changes are forecasted to accelerate and worsen in the 21st century, with a

potential economic cost of $20 trillion per year by the year 2100.2

In 1992, an international effort began in Rio de Janeiro, Brazil with the signing of the

U.N. Framework Convention on Climate Change, a long-term aim to stabilize GHG

concentrations in the atmosphere at a level that would prevent dangerous anthropogenic

interference with the climate system. In 1997, a multi-national plan called the Kyoto Protocol

came into negotiation. The protocol called for a binding target to reduce emissions by 5.2%

below 1990 levels by 2012 in participating industrialized countries. One hundred nations ratified

the protocol, and on February 16, 2005 the Protocol came into effect.3

The United States, under the Bush administration, decided not to ratify the Kyoto

Protocol and adopted a voluntary program to reduce Americas greenhouse gas (GHG) intensity.

It claimed that this strategy would be more beneficial because reductions would occur withoutdamaging the nations economy. Alternatively, the European Union adopted a mandatory GHG

reduction scheme, called the Emissions Trading Scheme, creating a market between twenty-five

developed and developing countries with the hope of reducing GHG emissions and spurring

economic activity.

The U.S. Voluntary Approach

Overview

In 2001, the United States decided not to ratify the Kyoto Protocol, an international

agreement to reduce GHG emissions, on the basis that it would affect its economy.4 Avoiding

1 Intergovernmental Panel on Climate Change.2 Ackerman, Frank, and Stanton, Elizabeth.3 Pew Center on Global Climate Change.4White House.

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mandatory caps on GHG emissions from all sources, the new administration decided to address

climate change through a voluntary approach that emphasizes partnerships that voluntarily

reduce GHG intensity, known as the ratio of GHG emissions per unit of Gross Domestic Product.

The national goal is to reduce GHG intensity by 18% through 2012. This policy includes several

programs for voluntary reductions of GHG emissions, including Climate VISION, Climate

Leaders, SmartWay Transport Partnership, and ENERGY STAR.5

In addition to voluntary reductions of GHG emissions, the U.S. policy includes

investments to improve renewable energy and energy efficiency technologies, higher fuel

economy for light trucks, tax incentives for renewable energy and fuel efficient vehicle

technologies, and a voluntary GHG registry, among other programs. In terms of science and

emerging technologies, the policy directs funds to improve climate science and understanding

and develop new technologies like carbon capture and sequestration, clean coal, hydrogen, andnuclear fusion and fission. Finally, the policy promotes international collaboration in removing

barriers to clean energy technologies around the world.6

There are several examples of how this policy is working to slow the growth of GHG

emissions. The Climate VISION program has ensured the commitment of 14 U.S. industries,

accounting for 40% of U.S. total emissions, to GHG intensity reductions.7 The Climate Leaders

program has garnered 109 partners to date, with commitments from 59 partners for GHG

intensity reductions goals. Presently, 5 of these partners have achieved their goals.8 These

commitments by companies and sectors have led to the development of new tactics to achieve

GHG intensity reductions.

Recently, a new market has emerged to help meet voluntary GHG emission reductions.

This new market provides carbon offsets or credits by funding the implementation of renewable

energy technologies that displace fossil fuels or by conducting practices that sequester carbon

dioxide (such as tree-planting or no-till agriculture). These carbon offsets can then be purchased

by individuals and companies to meet their own GHG emission reduction goals. The essential

concept of this mechanism is that it encourages the addition of projects that reduce GHG

emissions. Only new, additional projects can be considered for credits under this market

mechanism.9

5 Department of State.6 Department of State.7Climate VISION.8Environmental Protection Agency.9 Taiyab, Nadaa.

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This new carbon market is being used by businesses, non-governmental organizations,

government agencies, international conferences, and individuals to voluntarily reduce their GHG

emissions. For example, an increasing number of businesses and agencies, including HSBC

Bank and the World Bank, have made commitments to reduce their energy use and purchase

carbon offsets for the remaining GHG emissions.10 This growing market has allowed companies

to more easily achieve their GHG intensity goals on a voluntary basis, as the current U.S. policy

advocates.

In terms of international collaboration, the U.S. voluntary approach has led to the

establishment of the Asia-Pacific Partnership on Clean Development and Climate. This

partnership promotes the development and deployment of clean energy technologies.11

Consisting of six countries, this partnership focuses on expanding investment for clean energy

technologies and addresses 8 public-private sectors. Although partners have different GHGreduction goals, they all have the common goal of enabling deployment of clean, efficient, and

cost-effective technologies.12

The U.S. voluntary approach to reducing greenhouse gas emissions has created a strong

debate amongst those who believe stronger, mandatory actions must be taken to reflect the

recommendation of consensus-based science and those who believe that a voluntary approach is

the best option to achieve climate stability and economic growth.13 According to Cornell

Professor Duane Chapman, I have no doubt that the Presidents voluntary program has had zero

effect on greenhouse gas emissions.14 Nonetheless, it has provided incentives to reduce the

growth rate of greenhouse gas emissions in the United States.

Advantages

Although the U.S. policy is independent of the Kyoto Protocol, many companies have

discovered the advantages of finding cost-effective ways to improve efficiency while also

reducing emissions. Many believe that by taking the necessary steps under a less intensive

voluntary emission reduction scheme, they will be better prepared if the U.S. were to eventually

sign an agreement that mandated reductions in GHG emissions.

10 Taiyab, Nadaa.11 Such as wind, solar, geothermal, biomass, hydro, combined heat and power, and others.12Asia-Pacific Partnership on Clean Development and Climate.13 Pew Center on Global Climate Change.14 Interview: Duane Chapman.

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The current administrations policy to reduce GHG intensity is most advantageous in its

ability to set the stage for a more stringent future. The voluntary approach is greening the

nation, spurring technological innovation, increasing industry standards and responsibility, and

developing a nationwide image of environmental stewardship. According to Stephen Eule of the

Office of Climate Change Policy in the White House, the current policy provides a cost-

effective ways for industries to reduce GHG emissions as responsible corporate citizens, thus

greening their image and increasing business15.

Another advantage is that if mandatory reductions are required in the future, some of the

participating sectors may receive credits for their previous reductions. According to Larry

Mansueti, an associate of Climate VISION in the Department of Energy, the two strongest

aspects of the policy are preparation and experience. With the education gained from this

voluntary approach, national motivation can be elevated to a level where something will beaccomplished on a larger scale. He also notes that enough voluntary efforts may delay the need

for mandatory policy, and that the policy currently in place is spurring development of cleaner

technologies that could set the stage for a mandatory program after 2012. 16 Aside from

preparation, the current policy includes immediate benefits such as tax incentives for renewable

energy, hybrid vehicles and deployment partnerships, USDA incentives for sequestration, and

conservation of tropical forests and other land-based carbon sinks.17

Many corporations have become green and are engaging in a carbon trading market to

help reach the goal of reducing GHG emission intensity using cost-effective technologies and

strategies. The primary attraction of emissions trading is that a properly designed program

provides a framework to meet emissions reduction goals at the lowest possible costs.18 Because

voluntary carbon offset markets are independently designed, they are free from the stringent

guidelines, lengthy paperwork, and high transaction costs, giving project developers more

freedom to invest in small-scale community based projects. Moreover, because the policy is not

managed at the national level, it encourageslocal economic development.19

Disadvantages

15 Interview: Stephen Eule.16 Interview: Larry Mansueti.17 Marlay, Robert C.18Ellerman, A.D., P.L. Joskow, and D. Harrison, Jr.19 Taiyab, Nadaa.

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Although the policy is praised for some corporate advantages, it is also criticized for a

lack of realistic and attainable GHG emission reductions on a national scale. First, it is uncertain

that emission reductions will not occur under this policy. According to an article published in

The New York Times, the administrations climate policy will result in emissions growing 11

percent in 2012 from 2002. In the previous decade, emissions grew at a rate of 11.6 percent,

according to the Environmental Protection Agency.20 This seems more like emissions are

leveling rather than declining.

Although encouraging at face value, the voluntary approach creates the image of a rich

gentlemans club only for those that can afford to reduce GHG emissions. According to

Cornell Professor Timothy Fahey, the voluntary approach has no hope. He believes the

voluntary strategy may create a green image for businesses, but it doesnt create national

motivation or a sense of emergency.

21

There are also criticisms of the carbon trading market that have evolved as a result of the

voluntary approach; they revolve around the issues ofadditionality, permanence, and leakage.

The source of the carbon offset must be new and not already in existence. For instance, if a

company buys credits from a forester whose trees are already sequestering CO2, overall

emissions do not decrease, so the offset is not additional. Permanence refers to the assurance that

an offset will remain in working order for the length of time specified. Lastly, leakage occurs

when events outside the project boundary, but related to the project, reduce the projects carbon

benefit.22

The primary disadvantage of a voluntary emissions reduction policy is the lack of

regulatory pressure and competition. Instead, those sectors included in the strategy must be self-

motivated if GHG intensity reductions will occur. Moreover, most of the upfront costs, such as

technology upgrades and investments, deter corporations from joining the voluntary program. In

effect, the voluntary approach does not address climate change according to its actual urgency.

The European Emissions Trading Scheme

Overview

20 Revkin, Andrew.21 Interview: Timothy Fahey.22 Taiyab, Nadaa.

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The European Union Emission Trading Scheme (EU-ETS) is a GHG emission trading

scheme. It was launched in 2005 as the largest multi-country, multi-sector GHG trading scheme

worldwide. The scheme is based on Directive 2003/87/EC, which entered into force on 2003.

This Directive aims to establish an emissions trading system to promote reductions in a cost-effective and economically efficient manner.

The EU-ETS has the opportunity to advance the role of market-based policies in

environmental regulation and to form the basis for future international climate change policies.

In the first phase (2005-2007), the EU ETS includes some 12,000 installations, representing

approximately 45% of EU CO2 emissions. Although the ETS covers only CO2 emissions from

four broad sectors in the first phase, the second phase (2008-2012) expands the scope by

including the other GHGs.

All important provision of the EU-ETS is briefly presented at the Appendix.

Advantages

The main advantage of emissions trading under the EU-ETS is that firms can flexibly

choose to meet their targets, rather than use predetermined technologies or standardsas in

command-and-control policies.23This is, in fact, the advantage of any market-based

environmental strategy. The flexibility provided by emissions trading makes a smooth transition

possible, which is, at least theoretically, a preferred way for the regulated companies.

According to economic theory, GHG emission reductions from each source are

economically efficient under market equilibrium.24 Emissions sources, under this system, have

low-cost reduction opportunities and can sell their additional allowances to sources where

reductions would be more difficult and costly. This leads to the lowest overall cost or most

economically efficient solution.

The relatively low overall transaction costs under EU-ETS25 and the possibility for high

volume and activity within the market26

can be seen as the factors that make the system efficient.

23 Pew Center on Global Climate Change, 2005, p.224 Kolstad, p.16325 It is mainly caused by the large size of each point source. At least for beginning, there are not millions of parties

to negotiate or bargain to reach an acceptable solution. The limited number of participants (around 12,000installations for the first phase) facilitates negotiation and reduces transaction costs.26 Pew Center on Global Climate Change, 2005, p.17

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It is expected for such a market to facilitate GHG emissions reductions, make prices more

competitive, and broaden the range of marginal abatement costs.

Another advantage of the emissions trading scheme over pollution fees is its pressure on

emission quantity. With an emission fee, we know precisely what the marginal cost of control

will be; we are less sure about the quantity of pollution; on the other hand, in a marketable

permit system we know exactly how much pollution there will be; we are less sure of the

marginal cost of control.27 Since marginal abatement costs are uncertain and we assume they are

relatively constant in relation to marginal abatement benefits, we can theoretically claim that

quantity regulation (permit trading) would be better than price regulation (emission tax).28

Moreover, when the economy is experiencing inflation, the market price of pollution rights

would be expected to keep pace automatically, while changing the tax rate could require a

lengthy administrative procedure.

29

There are different economic structures and energy use patterns among European nations,

so a pollution tax system is less politically appealing. Implementation of direct pollution tax

would probably make the system difficult to proceed because many European countries are

unwilling to enact a carbon tax or any other pollution taxes of a progressive nature due to their

concerns about the impact of such taxes on electricity prices and the competitiveness of energy-

intensive local industries and dominant electric utilities.30 As a result, the emissions trading

system is the politically best solution to enforce with respect to other incentive-based solutions

such as pollution fees.

If penalties are greater than the permit prices, then this shows that the system will likely

function efficiently. The EU Directive establishing the EU-ETS requires a violating source to pay

a penalty for excess emissions of 40 Euro/CO2 in the first phase and 100 Euro/CO2 in the second

phase. In addition, these firms must also proportionately reduce their emissions in the following

year by this excess.31Since these stiff penalties have been significantly higher than permit prices

to date, this provision can be perceived as ideally designed.

27 Kolstad, p.14428 There are some counter-arguments on this issue. For example, Pitzer (2002: p.432) claims that taxes are much

more efficient than permits for controlling GHG emissions by a factor of five to one. However, he assumes thatmarginal benefits partially a product of the assumed quadratic damage function (catastrophic outcomes due toclimate change).Since his arguments cannot be tested yet (no catastrophic scenario has been realized), it is better forus to accept conventional arguments about tax and permit policies.29 Rosen, p.9730 Choi, p.89831 European Parliament, Article-16, p. L 275/37

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Bankable permits can increase the viability of an emission trading system. Although

member states have forbidden the banking of ETS allowances from the first to the second

periods, Clean Development Mechanism (CDM)credits can be banked. They are likely to be a

popular hedge for the 2008-2012 trading period. This is an advantage because it facilitates GHG

reductions by companies within countries with binding emission reduction targets, although there

is also opposition to this strategy.

The transparency in monitoring and reporting are strong enough to deter regulated

companies from evading emission reductions. Under the EU-ETS system, the use of third-party

certification is allowed and independent auditing is possible. Third-party certification may

actually help reduce administrative costs. Although some analysts believe that third-party

certification can create a dispute over standards and methods of verification between the

government and entity,

32

this is not likely a significant problem. The European Commissionpublished a 75-page Decision and Guidelines that specifies methods for computing indirectly

ormeasuring directly CO2 emissions from each of the industrial categories covered under the

ETS.33

Disadvantages

The EU Directive covers only CO2 emissions during Phase I. The CO2-only policy

exempting other GHGs34 does not take full advantage of all the environmental and economic

benefits that the comprehensive approach covering all GHGs can offer. Other GHGs are

generally more potent global warming gases than CO2. Therefore, if unaddressed, a shift to other

activities that generate non-CO2 emissions could negate CO2 reduction benefits outside the

trading program. For example, increased natural gas production can lead to increased emissions

of methane (CH4) due to the mismanagement of gas pipeline systems.35

Transportation is a very important sector whose emissions continue to grow strongly,

despite ongoing policy measures.

EU-15 GHG emissions from domestic transport increased by 24% between 1990 and2003. [They] are projected to increase by 31% from 1990 levels by 2010 using

32 Choi, p.93333 Detailed information can be gathered by European Commission Decision of 29 January 2004 establishingmonitoring and reporting of GHG emissions. Available at:http://ec.europa.eu/environment/climat/emission/mrg_en.htm34 There are six principal GHGs: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons(HFCs), perfluorocarbons (PFCs), and sulfurhexafluoride (SF6).35 Choi, p.906

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existing domestic policies and measures. The average CO2 emissions of newpassenger cars were reduced by about 12% from 1995 to 2003, but 16% more carswere sold in the same period, thereby [offsetting] any efficiency gains.36

Policy implementations ignoring this sector are likely to be insufficient. Nevertheless, ETS

does not cover emissions from transportation.In the EU, governmental decision-making is very complicated37 since both party and

national interests are represented in policy deliberation processes. This creates a considerable

challenge for preparation and approval of any legislation and can result in delays in legislation

and implementation. In addition, national allocation plans (NAPs), which are prepared by all

member countries for the ETS, are complex documents that promote bureaucracy.

Some people fear that many member states have been overly generous with their initial

allocations. There is distrust between member states, partly due to contentious negotiation

processes for installation coverage. During these processes, individual country characteristics in

the projection of emissions are subject to discussion. Many ETS participants are concerned over

disparate allocation methods and over the perception that each country favored certain industries

over others, which could lead to adverse competitive impacts within the EU.38

Under these circumstances, one can easily question whether the political support will be

durable in the future. If the EU-ETS results in higher than expected energy price increases

and/or relative impacts on sectoral competitiveness in different member states39, then political

pressure over the national governments would likely increase.

Allocation method is also as important as number of allowances for determining price

levels. According to Shawhan, one important factor for the efficiency of the system is how

many allowances are allocated compared to supply of abatement. It appears in the EU-ETS there

have been so many allowances ending up with very low prices. It means less abatement.40 In the

first trading period (2005-2007), at most 5% of allowances can be auctioned; in the second

trading period (2008-2012), at most 10% can be auctioned.41Although some countries

(Denmark, Hungary, Ireland, and Lithuania) will conduct auctions, and others (the U.K., the

36 European Environment Agency, p.3437 First the European Commission proposes new legislation. The European Council, where member countries are

represented by their respective ministers (environment ministers in the case of the EU-ETS), and the EuropeanParliament are co-legislators and decide the content of Directives (i.e., pass laws). Then the EU Commission ensuresthat all legislation is implemented properly.38 Thompson, p.1139Pew Center on Global Climate Change, 2005, p.1740 Interview: Dan Shawhan,41 European Parliament, Article-10, p. L 275/36

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Netherlands, and Portugal) intend to auction unused allowances from the new entrants reserve,42

most member countries prefer free allocation.

Nevertheless, there are compelling arguments for the advantage of auctioned permits over

free distribution.Auctions are cost effective solutions. The revenue raised by an auction can be

used by the government to compensate a distortionary tax or to monitor compliance.43 The only

serious possible problem with the auctioning scheme is that incumbent firms might be able to

buy pollution licenses in excess of the firms cost-minimizing requirements to deter other firms

from entering the market.44

CDM and Joint Implementation (JI) are problematic issues despite their potential

contribution for emissions reduction. The baseline inventory, monitoring, and verification of

claimed reductions are contentious since there is ongoing scientific uncertainty about how to

measure GHG removals obtained by afforestation and reforestation projects. However, CDM canactually reduce GHG emissions accurately through clean energy technologies and energy

efficiency in developing countries.

As indicated by the Pew Center on Global Climate Change,

A[nother] pressing uncertainty concerns the availability of international CDMprojects from developing nations. In a review of the world market for carboncredits, the World Bank estimated that in 2003, 78 MT CO2 of credits were traded,primarily via project mechanisms. (...) Existing CDM projects have each averagedaround 250,000 tons CO2 in size and so to meet projected EU-ETS demand wouldrequire around 800 projects (around 1,700 projects if additional demand from otherKyoto nations is considered). The current pace of evaluation and acceptance ofprojects by the CDM board raises considerable doubts that enough projects couldbe certified in time.45

Due to this availability problem, the projected use of carbon sinks for achieving the EU-15

Kyoto target is so far relatively small. The estimated removal by forestry and agricultural

activities is 31 and 0.8 MT CO2 per year respectively or in total about 0.7 % in relation to the

EU-15 target of 8 %.46

Under the ETS, each nation will have its own registry containing accounts that will hold

the allowances. These registries interlink with the community transaction log, operated by the

European Commission, which will record and check every transaction.47 The registry system is

42 Thompson, p.1043 Keohane et al, p.56244 Rosen, p.9745 Pew Center on Global Climate Change, 2005, p.1446 European Environment Agency, p.4347 Thompson, p.14

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difficult to administer because it aims to coordinate operations of different national registries. Its

complexity may be caused by the design target to integrate this system with an international

emissions trading program in the future, but this eventually will increase transaction costs.

Discussion

Comparison of Approaches

In response to global climate change, the United States and the European Union have

taken different approaches to reducing GHG emissions. The United States voluntary approach

differs from the European Unions Emissions Trading Scheme in stringency of requirements,

program transparency and monitoring, and overall impacts. While each approach is both

criticized and applauded by different parties, each has created verified data that shows their real

strength and effectiveness.

The United States voluntary approach requires the country to voluntarily reduce its GHG

intensity by 18% by the year 2012. This requirement does not require actual reductions in GHG

emissions, and therefore allows for emissions to continue growing. It does, however, promote the

reduction of the growth in GHG emissions. According to a recent study conducted by the White

House, GHG emissions will grow by 11% above 2002 levels by the year 2012.48 Therefore, the

voluntary approach is not reducing GHG emissions because it is not stringent.

On the other hand, the European Unions Emissions Trading Scheme (EU-ETS) requiresmandatory reductions of CO2emissions in three phases. The overall goal is to reduce CO2

emissions by 8% through the Emissions Trading Scheme.49 In this case, GHG emissions are

being reduced, as opposed to the case in the United States, where the growth in emissions is

being reduced but total emissions continue growing.

The United States approach also has a voluntary registry for GHG emissions. In this

approach, companies may choose or refuse to report their GHG emissions. On the other hand, the

ETS has a mandatory registry, where companies are required to report their GHG emissions. This

allows the European Union to have much more accurate data on which to make decisions, while

the United States voluntary registry may not have complete data.

Finally, there are different advantages to each approach. The main advantage of the

voluntary approach may be that companies and sectors are receiving experience in reducing

48 Revkin, Andrew C.49

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GHG emissions and are preparing for more stringent emission reduction goals. It may also be

providing improved public image to companies to increase sales. The ETS, on the other hand,

have quantifiable impacts on GHG emissions and is providing incentives for a much faster

transition to technologies that reduce or have lower GHG emissions. It is clear that, from a

comparison of both approaches, the ETS is actually working more effectively in reducing GHG

emissions while promoting economic efficiency.

Recommendations

The voluntary approach and the ETS both have disadvantages that prevent required

reductions in GHG to occur as the science recommends. We believe that different strategies must

be integrated to address GHG emissions from all sources. These strategies can focus on

improving industry to reduce GHG emissions, innovating energy efficient technologies, furtherdeveloping clean energy technologies, providing incentives that reduce land-use GHG emissions,

emission trading and government administrative approaches, such as taxation or subsidies.

Critical analysis of an emissions trading mechanism should not be only narrowed as a

trading mechanism. Under trading mechanisms, there is an entire set of institutions consisting of

administrative and bureaucratic approaches, including the National Allowance Plan (NAP),

government taxation and subsidization, market incentives, exchanges among nations and

companies, and sharing among the 25 nations in the European Union. In the case of the EU-ETS,

we have found several flaws that should be corrected under a future emissions trading scheme.

An emissions trading scheme should also include other sources of GHG emissions,

particularly transportation. In the case of the European Union, the increase in emissions coming

from transportation in the last decade has been very large. Addressing this sector in a future

emissions trading scheme is highly advisable and would ensure that more sources of GHG

emissions innovate to reduce emissions.

Emissions trading schemes should also allow for strict monitoring and enforcement.

Under the EU-ETS, monitoring has not been very effective when trading internationally.

Clarifying how physical reductions will occur should be an important part of an emissions

trading scheme to ensure that GHG emissions are in fact being reduced. Finally, an emissions

trading scheme needs governmental commitment. If this mechanism is to be expanded to other

regions of the world, governments must be committed to taking the appropriate steps to enforce

real reductions in GHG emissions.

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Conclusion

Despite the fact that both approaches have not been in effect for long, it is possible to

extract similarities and differences. Both strategies use market-based solutions and emerged due

to the specific political conditions in each region. From the analysis, it is clear that the EU-ETS

seems a more promising approach as it is supported by top level governmental offices whereas

no realistic impact could be seen in the US voluntary approach. With no doubt, effective

government actions are typically needed to orient the market in a direction in accordance with

the public interest. The effect of volunteerism is likely to be restricted by profit motives.

Despite its shortcomings and limited scope, the ETS can provide important information

not only for the U.S., but also for the rest of the world. The pioneering role of the EU can also be

a factor to convince policy makers to take significant steps for carbon mitigation policies. On theother hand, a prospective success in U.S. programs could provide important lessons to the EU for

second phase measures, and especially for the enforcements that will take place after 2012.

In short, while both approaches seek to address climate change, they are not perfect and

therefore teach us important lessons for future policies to reduce GHG emissions. The U.S.

voluntary approach does not reduce GHG emissions, whereas the ETS only addresses part of the

problem and faces many administrative andpoliticalshortcomings. A mix of market-based

solutionspromoted by government incentives are necessary to address climate change by

improving energy efficiency, developing and deploying clean energy technologies, increasing

average vehicle fuel economy, providing incentives to land-use GHG emissions sources, and

instituting trading schemes that are domestic in nature. These strategies would be the next step in

using market-based, efficient solutions to climate change.

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Documents

US v. EU Carbon Strategies 2001-2008