Here are two good pieces of news from Germany. First, we congressmen escaped from being stuck in a hot and crowded elevator in what was once East Berlin, built, we were told, by communist technology. No wonder the Soviet Union collapsed. Second, everybody in Europe agrees about the cap and trade system. They all agree it has worked however they all agree that a few things went wrong - pretty much like their elevator system.
On Wednesday, we met with a wide spectrum of Germany’s leadership from the Environmental Minister, to the Economic Advisor to Merkel, to the Foriegn Affairs Office. Since they are of different parties, it was a bit surprising to find such consensus.
What was heartening was that they all felt the plan was working, both from an environmental and economic perspective. It was the Environmental Minister who pointed out that Germany has created 1.5 million jobs associated with clean energy and has captured 20% of the world’s renewable fuels market. The 2010 target for renewables was met in 2007. The cap and trade system has reduced CO2 by 50 million tons per year, which, in combination with the 100 million tons reduced by the feed in tariff efforts, is quite an achievement.
One of their successes was to create separate pools for utilities and industries. This allowed them to place the cost more on the utilities instead of the industries thus avoiding the problem of the industries becoming uncompetitive in the international market.
But the Europeans were also amazingly united in describing the problems with their system and described this process as their “teething pains.” They told us repeatedly that the cap and trade system still enjoys the confidence of the people precisely because they look at the first stage of the program as a trial period, with the expectation that there would be lessons learned. Here are those lessons:
1: The originally system was not sufficiently aggressive so that more allocations were issued than were needed. This resulted in windfall profits by the European utilities who simply pocketed the free permits and then charged their customers what they called their “opportunity costs,” a scam worthy of Enron.
2: The Europeans simply had inadequate regulatory mechanisms to prevent this abuse of rate payers which was a problem exacerbated by the fact that there is an oligarchy in electricity in Europe with only four companies providing the bulk of the power.
3: The system was not transparent and had a lack of public disclosure.
4: There should have been an auction of at least a significant part of the allocations. This failure prevented a real price being set, allowed windfall profits to be obtained, and minimized the price signal to the industry.
5: There should have been a benchmark of the best available technology with industry expected to use such technology.
Fundamentally, they recognized that a price of about 20 euros per ton was needed to create an incentive for the adoption of cleaner technologies, and since the trial period ended and credits could not be banked from one period to another, the price had gone down to essentially zero. This argues for both banking and a longer period to begin with in the system.
Minister Sigmar Gabrial was sporty chap who had a wry way about him and expressed the interesting view that China and India were “in the shadow” of the U.S. and were hiding in that shadow, refusing to act by using the U.S.’s inaction as an excuse for their own. Obviously, it is in both our and Europe’s interests to remove that excuse.
The need to act was buttressed that morning by a disturbing report from home from NASA which concluded we have only ten years to act or we will reach a “tipping point” where climate change becomes uncontrollable, along with the presentation by Dr. Schellnhuber of the Potsdam Climate Center who told us there is not just one “tipping point” but many, including the prospects of huge methane gas releases from the tundra and the melt of the Greenland ice sheet. He also pointed out the enormity of the challenge by noting that the U.S. has 800 cars per 1,000 residents while China has 2.5 cars per 1000 residents. What happens when the Chinese want cars? Obviously, we need an entirely new transporation fuels technology, exactly what my low carbon fuels standard fuels bill will provide. The next day, a European chap asked me about the bill at a lunch meeting which surprised me that the Europeans are reading my bills, something I didn’t know even Americans were doing!
The Professor noted that we were heading to 8 degree centigrade increases in temperature in the temperate zones even if average global temperatures were in the 5 degree increase range. It is like the frog that half in boiling water and half in ice water, on average the frog is OK.
He said the Greenland ice sheet is the “Achilles heel” of the world’s climate and if the temperature goes up a mere 2.7 degrees C it will melt completely. That means that a mere doubling of Co2 from pre-industrial times could result in a 50 meter sea level rise, inundating the world’s coast lines. This is worse news than we thought and dovetails with our NASA revelations. He says the first thing we should do is have a building standard that assures building efficiency of 40 kilowatt hours per square meter per year.
These seem like daunting challenges, but the early news from Europe was heartening in that even though the first carbon cap simply required no growth, Europe enjoyed a 7% reduction in Co2 emissions just because business responded the prospect of costs. Germany went from 1228 million tons Co2 in 1990 to 1007 in 2006 and will hit a 21% target at 974 in 2012. Now Germany has a goal of hitting a 40% target in 2020 which will put them at 737. In short, Europe has enjoyed some real successes even though their first cut at a cap and trade system was flawed from the beginning. The representative from Deutsche Umwelthilfe stated that the cap and trade system generated 50 million tons reduction of Co2 and the feed in tariff system generated 100 million.
The next day in Brussels, the importance of actions other than cap and trade was driven home by Jos Delbeke, Director of the European Commissions climate Change and Air Sector, who told us that other regulatory measures are necessary where a cap and trade system simply cannot promote change. This is particularly true in regard to developing technologies. For instance, to get the equivalent of the amount of taxes now on transportation would take a carbon price of 150 euros per ton, clearly something that would not occur. The Europeans are considering adoption of a standard that will require their average car to get 42.5 miles per gallon, something that they could never achieve simply through a cap and trade system. He said it would take twice the conceivable price of carbon to drive the widespread adoption of solar in Germany that has been achieved through a feed in tariff. This is comforting since it demonstrated the need for my RPS bill or a feed in tariff bill to boost the solar and wave energy industries in the U.S. I like Europeans when they confirm my beliefs, or they provide incredible apple strudel, like I had Thursday in Berlin.
Now Europe is moving toward a cap and trade system for methane and Co2 and Mr. Delbeke believes a price of 40 euros will make sequestration of Co2 from coal economically desirable. He says two things happened when the system went in to effect as price went up and Europe liberalized its electricity market, so its hard to ascribe much if any price increase to the system.
Now I am writing this on hot English bus, stuck in bumper to bumper traffic trying to get to London. In this way, Americans and Europeans suffer in the same way. Soon we will also fight global warming the same way, with effective, aggressive, and common sense tools the world can unite around. If we ever get through this traffic, that is.
