Is it too early to judge Europe's carbon trading scheme?

There are few things the press enjoys more than criticising government, and if you are going to criticise there are few easier targets than their environmental policies.

It is no exaggeration to describe the vast bulk of climate change legislation as an ineffectual mess that completely fails to match politicians' rhetoric about the seriousness of the global warming threat. It is also fair to argue that unless this scandal is widely reported there is even less chance of getting governments to face up to the problem.

And yet the reporting of the recent news that the EU Emissions Trading Scheme has singularly failed to reduce European carbon emissions still strikes me as a little unfair.

According to reports the two-year-old scheme is in "disarray" after the carbon emission quotas for heavy industrial plants were set far too high. As a result last year 93 percent of the plants covered by the scheme failed to use up their full carbon emissions quota, which created a glut of available carbon credits and ensured that the spot price plummeted to around €1 per tonne. Meanwhile, total emissions across the EU actually rose by between 1 and 1.5 percent.

This indisputable malfunctioning of the scheme has prompted a strange cabal of environmentalists, anti-Europeans and free marketers to lambast the trading mechanism as another example of ineffectual EU regulation and Europe's hypocritical, holier-than-thou attitude to global warming.

But while it is fair enough to claim that the ETS has not had the desired effect it is simply too early to brand the scheme a total failure and completely inaccurate to suggest that two consecutive years of rising carbon emissions means carbon trading is inherently flawed.

When, two years ago, the EU originally set the quotas for the scheme it had very little accurate data to go on and had to pretty much accept the caps that governments proposed. Quite rightly, both individual governments and the EU realised that if they made the emission caps too tight from the start they would stoke up massive opposition from the business community, force the worst polluters to relocate to the developing world, find itself hauled through the courts by numerous companies, and effectively kill the scheme stone dead before it had even started.

In their attempts to avoid this scenario EU politicians went too far the other way and set the allowances far too high, resulting in no impact on carbon emissions. But they also proved the underlying trading mechanism could work and began to collect the data necessary to ensure that future emission allocations are lower than businesses currently require.

This information has already begun to take effect. In 2005 the firms in the scheme emitted 66m fewer tonnes of carbon than allowed; last year, with allocations tightened, they came in 30m tonnes below their quota. Meanwhile, the UK, Denmark, Ireland, Italy and Spain proved that they could set allowances lower than businesses required without having an adverse effect on the economy.

Now every indication from Brussels is that the second phase of quotas running from 2008 to 2012 will be far tighter still, finally dishing out quotas low enough to force firms to reduce their carbon emissions or buy in increasingly expensive carbon credits. Earlier this year the EU ordered several countries to reduce the quotas they were proposing still further and now drastic cuts look likely with Poland, for example, proposing to cut its permit total by over a quarter and Latvia and Lithuania by half.

As a result several large firms, including Cemex and US Steel, are taking the EU to court over the reduced quotas, but rather than suing an embryonic scheme, they are taking on a mechanism that has had two years to shore up political and business support.

Emboldened by this political support the EU has also set out plans to expand the scheme to include far more companies, incorporate the aviation industry and even extend the carbon trading market to several US states.

It would have been good if the EU had set the quotas at the right level from the start, and there is no doubt that the true test of the scheme will come in the next two years as the quotas are lowered and heavy polluters begin to find they are being penalised. But on balance the EU was right to take a cautious approach while bedding in the controversial scheme and can now face the various legal challenges that will surely come with confidence.

The first two years have not been perfect, but it is far too early to brand them a complete failure.

Although if in two years time the quotas are still being set far too high and carbon credits are trading for a euro a time then you'll find me pouring scorn on Europe's politicians along with everyone else.

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