Naomi Klein Undervalues the Potential of the EU's Cap-and-Trade Plan to Curb CO2
- April 9, 2015
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Naomi Klein’s book “This changes everything” is the only bestseller to have discussed EU’s cap and trade system at such length. Klein is critical of cap-and-trade and goes as far as to say that it is a waste of time. The problem is that she omits crucial historical evidence to make this extreme conclusion.
Other reviewers have already pointed out many of the omissions Klein makes in her writing on climate policy. Joe Romm at Climate Progress has aptly shown how Klein mischaracterizes cap-and-trade. Canadian environmental economist Mark Jaccard has also pointed that Klein does not fairly present and weigh the evidence on carbon trading. Here, I take a look at what Klein has to say specifically about EU’s cap-and-trade policy.
I do not mean to vindicate EU’s cap-and-trade. It’s a system full of flaws. And while lawmakers in Brussels are working on fixing these, it is not clear whether they will have the political will to do so. As I’ve written before, the current proposals to reform the carbon market do not go far enough to make it an effective climate policy. My intention here is to provide a more historically accurate account of EU’s cap-and-trade than the one offered by Klein. And so, on to the review.
Can EU’s cap-and-trade work?
The book chronicles the history and failures of EU’s cap-and-trade system. Klein reminds us that EU policy makers initially gave away all CO2 permits to companies for free, resulting in huge windfall profits. She laments the fact that European companies were allowed to use international carbon offsets, many of which, it later turned out, did not reduce emissions. And then she concludes it “hasn’t even worked” based on a single citation from a subset of environmental organizations, which claim the system has not reduced emissions. Let’s look at each of those in turn.
Klein fails to mention that the EU has been making polluters pay for half of all the CO2 permits since 2013, generating billions of revenues for governments to use towards climate finance. The EU has also phased out bad offsets, which Klein admits, and currently only allows genuine international offsets. Therefore, these purported flaws are actually nothing more than growing pains.
And has it worked? EU’s cap-and-trade did, in fact, reduce emissions in the past. Estimates suggest the system prevented hundreds of millions of tons of emissions in its first years of operation. Klein probably understands she is on loose ground so far so she goes further, trying to find something that is intrinsically wrong with cap-and-trade.
“The central flaw” of cap-and-trade, she says, is that it produces a carbon price that is too volatile. She correctly asserts that the fall of Europe’s carbon price from €30/t in 2008 to its current single-digit levels is delaying low-carbon investments. For this reason, Klein seems to suggest that we should scrap cap-and-trade. At the same time, she implicitly supports the idea of a carbon tax. However, price volatility is not an inherent feature of cap-and-trade. A properly designed cap-and-trade can deliver a stable carbon price just as a carbon tax would.
Based on the European experience, California has designed a successful cap-and-trade with a price floor. The policy is raking revenues in the hundreds of millions every year through the sale of CO2 permits, which the state is using to finance clean technology.
The UK has implemented a price floor, which is successfully curbing coal use. And the EU as a whole is finalizing a legislative process to put a de-facto soft carbon price floor across the continent (also called “Market Stability Reserve“). The only problem with EU’s efforts is that they do not go far enough. To be effective, cap-and-trade needs strong grassroot support.
The Catch 22 of cap-and-trade
Klein hits the nail on the head when she exposes the real inherent shortcoming of cap-and-trade – the system is so intricate that it makes it hard for the public to mobilize behind it. This is the Catch 22 of cap-and-trade. To work well, the policy needs the sort of massive mobilization Klein calls for, but people will only fight for it if they believe it can work well.
The book does not contemplate on whether mobilizing a grassroot movement to reform EU’s cap-and-trade is a worthwhile effort. This may be because Klein fails to notice how similar cap-and-trade is to the type of climate action that she actually supports.
She extols the 1970’s “golden age” of environmentalism, which, she says, was about two things: limiting pollution and getting the polluter to pay. These two principles are exactly what cap-and-trade is at its core. Lawmakers set a certain cap on pollution and determine rules on how to distribute CO2 permits and whether to raise revenues. By participating in the decision making, the public can fight on these fronts to ensure the policy delivers the desired effects.
Should Europe’s climate activists fight for a strong cap-and-trade?
The problem with Klein’s broad-brush coverage of cap-and-trade is that it will likely keep some on the left from fighting to improve it. Wouldn’t it be more constructive for climate activists to make the most of their cap-and-trade law?
After all, national governments raise billions of euros per year from selling CO2 permits. Shouldn’t concerned citizens be trying to convince governments to invest as much of this money as possible on badly needed climate finance? Or fighting for ways to increase the European carbon price? The price affects thousands of companies across 31 European nations. A higher carbon price will be immediately felt across polluting sectors and cause real emission reductions.
At the heart of our failure to tackle climate change, writes Klein, is cognitive dissonance. But does Klein underrate the potential of cap-and-trade due to cognitive dissonance of her own, which leads her to brand anything related to markets as disaster capitalism?
The views expressed in this article belong to Emil Dimantchev and not his employer Thomson Reuters.
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