A report from the Government Accountability Office finds that Europe’s initial cap-and-trade system for limiting greenhouse gases set overly high limits and gave redistributed significant wealth to covered entities. The report (GAO-09-151), requested by Republican members of the House Energy & Commerce Committee, was completed November 18 but publicly released today.
The summary notes that the cap was set too high:
By limiting the total number of emission allowances provided to covered entities under the program and enabling these entities to sell or buy allowances, the ETS set a price on carbon emissions. However, in 2006, a release of emissions data revealed that the supply of allowances-the cap-exceeded the demand, and the allowance price collapsed. Overall, the cumulative effect of phase I on emissions is uncertain because of a lack of baseline emissions data.
The report also notes that polluting entities passed on the price of emissions permits to consumers, despite receiving them for free, resulting in windfall profits:
Studies have found that in the EU’s deregulated energy markets, power producers passed on the market value of allowances to consumers by adding the value of the allowances to energy rates.
The GAO also describes Europe’s international offset system, the Clean Development Mechanism, and notes the extreme difficulty in accurately calculating the worth of such investments in terms of emissions reduction. CDM investments are intended to prevent or lessen future emissions or factors such as deforestation which reduce the sequestration of greenhouse gases. Thus, the reductions are based against a hypothetical business-as-usual scenario, which cannot be precisely determined.