Sunday, December 23, 2012

Gas booms and carbon leakage

Following what I hope is my last written exam ever earlier this month, I must apologise for the sporadic posting of late. You see, I've also made my way home for a surprise visit to see the family and life is very much in the slow lane at the moment. (This is what we are dealing with, folks.)

Nonetheless, I did manage to write up something for the Recon Hub last week.Contrary to some negative Nigels, I argue that the availability of cheap American gas will not result in U.S. coal flooding the export market (and thereby undermining climate efforts on a global scale). The reason for this is that Europe has a cap-and-trade system in place and that means imported U.S. coal might displace coal from other regions, but not in a way that leads to materially higher emissions.
Gas Booms and Carbon leakage

... It seems to me that most commentators are missing something quite fundamental.  Namely, that Europe has an emissions trading scheme in the form of the EU ETS. This arrangement naturally places a cap on the total level of emissions, so that the influx of cheap American coal should matter little from a climate perspective. After all, the beauty of a cap-and-trade system is that it guarantees environmental effectiveness in a way that is indifferent of how you might achieve it. As long as the cap remains in place, the market can be allowed to figure out the most efficient way of reaching it. (The climate doesn’t care if CO2 emissions come from burning American or Polish coal, so why should we?)

The current situation also points towards an interesting strategic development. Thus far, Europe has effectively acted alone in establishing a multi-national carbon market with binding emissions targets. A chief criticism of this unilateral approach is that it could ultimately just encourage carbon leakage, as polluting firms and fuel sources move to regions without binding targets. However, I have just described a scenario that largely precludes such an outcome. The proliferation of domestic gas resources may be forcing U.S. coal producers to look elsewhere, but the EU ETS places concrete limits how much of an effect this can have on global emissions.