When and how will the US carbon market link-up with the EU ETS?

By Jos Cozijnsen

In an early June session, the Lieberman-Warner-Boxer proposal for an economy wide cap-and-trade system in the USA did not survive the vote. To be clear, the vote that was held was not a vote on the bill, but on: whether to stop debating the bill and proceed to a vote on the bill itself.

48 Senators appeared to be ready to accept the bill and voted to stop debating, with another 6 senators absent (including Obama, Clinton, McCain) who signaled that if they had been present, they would have voted to stop debating and accept the bill. These are at least two dozen more votes than the previous time when a comparable bill was proposed. It means that a total of 54 senators would have voted to stop debating and proceed to vote on the bill itself, though 60 are needed to adopt the bill. Nevertheless, Senator Lieberman said the international observers should be gratified that there is a growing support in the Senate to support the Bill.

Ambitious targets; wide coverage
The bill, named The Climate Security Act, aimed to cut the total US emissions by 66% by 2050. It would lead to a 2% reduction annually between 2012 and 2050, based on 2005 emission levels. The bill would have capped CO2 from 87% of US power plants, oil refineries and other emission sources, cutting emissions to 19 % below current levels by 2020 and 71% below current levels, by 2050.

Opposition mobilised
Opponents said it would cost jobs and raise fuel prices. Tens of amendments were submitted to the 500-paged proposal. But it didn’t come to a debate, because not enough senators voted to do so. Should the vote have been positive this time, then enactment of the proposal would not have been likely to occur. President Bush has consistently opposed a cap-and-trade plan and had vowed to veto this bill if Congress approved it.
Senate leaders opposed to the bill used a variety of tactics during weeklong debates on the Senate floor, including a request by Republicans to read an updated version of the 491-page bill aloud, which took 10 hours. Senate Republican leader McConnell said the debate will have no effect on either climate change or gas prices.

US cap-and-trade under the next president
Environmental groups are optimistic that a new president and Congress will adopt strong climate legislation in 2009; the earliest entry into effect will be 2011however, just before the post-Kyoto commitment period. This is not certain yet. It is not clear if new senators will support CO2 caps. Also, some senators who already voted in favour of the bill notified that they nevertheless want important changes to the bill. In order to implement a nationwide cap-and-trade system supported by at least 70 senators, the following legal provisions are expected to be made ultimately:
• Use of domestic offsets from the agricultural sector;
• Use of credits generated by avoiding national tropical deforestation (‘REDD’);
• Use of allowances from countries with a cap (EUAs and/or ERUs);
• Disallow the use of CDM credits (unless CDM will be phased out for larger developing countries, i.e. China and India);
• No link with emission trading systems from countries that allow CDM as offset mechanism.

To be able to link up with the EU ETS, the following scenarios are possible (provided the US is able to implement a strong enforced system on time):

• No direct linking, if the EU will allow CDM and US will allow REDD until after 2020;
• As of 2012, linking discounts for US and EUA allowances (for example -10% if 10% of the compliance emissions may be covered with CERs) and vice versa, based on the differences between the systems and the commensurate CO2 costs for companies;
• Full linking as of 2012, when the EU and US require to surrender a % CO2 allowances for goods imported from China and India, if they still disagree on emission targets as of 2020 (to prevent ‘carbon leakage)
• Indirect linking through the carbon market as of 2009 when US companies, under their post 2011 system are allowed to use previous emission reductions and credit purchases as ‘reward for early actions’ to meet compliance post 2011.