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US v. EU Carbon Strategies 2001-2008

US v. EU Carbon Strategies 2001-2008

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Carbon Mitigation: The U.S. Voluntary Approach vs.

the European Emissions Trading Scheme

Andrew Collier Carlos Rymer Hao Zhuang Kubilay Kavak Spring, 2007 NTRES 431: Environmental Strategies

Table of Contents
Introduction………………………………………………………………………3 The U.S. Voluntary Approach……………………………………………………3 A. Overview......................................................................................................3 B. Advantages...................................................................................................5 C. Disadvantages...............................................................................................7 The European Emissions Trading Scheme……………………………………….8 A. Overview......................................................................................................8 B. Advantages...................................................................................................8 C. Disadvantages.............................................................................................11 Discussion……………………………………………………………………….13 A. Comparison of Approaches........................................................................13 B. Recommendations......................................................................................14 Conclusion……………………………………………………………………….15 References……………………………………………………………………….16


Global climate change, which is being driven by greenhouse gas (GHG) emissions around the world, is largely “attributable to human activities.” Increasing temperatures have raised global sea levels; decreased the extent and thinned the thickness of Arctic sea-ice; forced the widespread retreat of non-polar glaciers; decreased global snow cover; thawed and degraded the permafrost in many regions; intensified El Niño events; shifted plant and animal ranges; extended the spring and fall seasons; increased coral reef bleaching; and increased economic losses globally.1 These changes are forecasted to accelerate and worsen in the 21st century, with a potential economic cost of $20 trillion per year by the year 2100.2 In 1992, an international effort began in Rio de Janeiro, Brazil with the signing of the U.N. Framework Convention on Climate Change, a long-term aim to stabilize GHG concentrations in the atmosphere “at a level that would prevent dangerous anthropogenic interference with the climate system.” In 1997, a multi-national plan called the Kyoto Protocol came into negotiation. The protocol called for a binding target to reduce emissions by 5.2% below 1990 levels by 2012 in participating industrialized countries. One hundred nations ratified the protocol, and on February 16, 2005 the Protocol came into effect.3 The United States, under the Bush administration, decided not to ratify the Kyoto Protocol and adopted a voluntary program to reduce America’s greenhouse gas (GHG) intensity. It claimed that this strategy would be more beneficial because reductions would occur without damaging the nation’s economy. Alternatively, the European Union adopted a mandatory GHG reduction scheme, called the Emissions Trading Scheme, creating a market between twenty-five developed and developing countries with the hope of reducing GHG emissions and spurring economic activity.

The U.S. Voluntary Approach
Overview In 2001, the United States decided not to ratify the Kyoto Protocol, an international agreement to reduce GHG emissions, on the basis that it would affect its economy.4 Avoiding
1 2

Intergovernmental Panel on Climate Change. Ackerman, Frank, and Stanton, Elizabeth. 3 Pew Center on Global Climate Change. 4 White House.


mandatory caps on GHG emissions from all sources, the new administration decided to address climate change through a voluntary approach that emphasizes partnerships that voluntarily reduce GHG intensity, known as the ratio of GHG emissions per unit of Gross Domestic Product. The national goal is to reduce GHG intensity by 18% through 2012. This policy includes several programs for voluntary reductions of GHG emissions, including Climate VISION, Climate Leaders, SmartWay Transport Partnership, and ENERGY STAR.5 In addition to voluntary reductions of GHG emissions, the U.S. policy includes investments to improve renewable energy and energy efficiency technologies, higher fuel economy for light trucks, tax incentives for renewable energy and fuel efficient vehicle technologies, and a voluntary GHG registry, among other programs. In terms of science and emerging technologies, the policy directs funds to improve climate science and understanding and develop new technologies like carbon capture and sequestration, clean coal, hydrogen, and nuclear fusion and fission. Finally, the policy promotes international collaboration in removing barriers to clean energy technologies around the world.6 There are several examples of how this policy is working to slow the growth of GHG emissions. The Climate VISION program has ensured the commitment of 14 U.S. industries, accounting for 40% of U.S. total emissions, to GHG intensity reductions.7 The Climate Leaders program has garnered 109 partners to date, with commitments from 59 partners for GHG intensity reductions goals. Presently, 5 of these partners have achieved their goals.8 These commitments by companies and sectors have led to the development of new tactics to achieve GHG intensity reductions. Recently, a new market has emerged to help meet voluntary GHG emission reductions. This new market provides carbon offsets or credits by funding the implementation of renewable energy technologies that displace fossil fuels or by conducting practices that sequester carbon dioxide (such as tree-planting or no-till agriculture). These carbon offsets can then be purchased by individuals and companies to meet their own GHG emission reduction goals. The essential concept of this mechanism is that it encourages the addition of projects that reduce GHG emissions. Only new, additional projects can be considered for credits under this market mechanism.9
5 6

Department of State. Department of State. 7 Climate VISION. 8 Environmental Protection Agency. 9 Taiyab, Nadaa.


This new carbon market is being used by businesses, non-governmental organizations, government agencies, international conferences, and individuals to voluntarily reduce their GHG emissions. For example, an increasing number of businesses and agencies, including HSBC Bank and the World Bank, have made commitments to reduce their energy use and purchase carbon offsets for the remaining GHG emissions.10 This growing market has allowed companies to more easily achieve their GHG intensity goals on a voluntary basis, as the current U.S. policy advocates. In terms of international collaboration, the U.S. voluntary approach has led to the establishment of the Asia-Pacific Partnership on Clean Development and Climate. This partnership promotes the development and deployment of clean energy technologies.11 Consisting of six countries, this partnership focuses on expanding investment for clean energy technologies and addresses 8 public-private sectors. Although partners have different GHG reduction goals, they all have the common goal of enabling deployment of clean, efficient, and cost-effective technologies.12 The U.S. voluntary approach to reducing greenhouse gas emissions has created a strong debate amongst those who believe stronger, mandatory actions must be taken to reflect the recommendation of consensus-based science and those who believe that a voluntary approach is the best option to achieve climate stability and economic growth.13 According to Cornell Professor Duane Chapman, “I have no doubt that the President’s voluntary program has had zero effect on greenhouse gas emissions.”14 Nonetheless, it has provided incentives to reduce the growth rate of greenhouse gas emissions in the United States. Advantages Although the U.S. policy is independent of the Kyoto Protocol, many companies have discovered the advantages of finding cost-effective ways to improve efficiency while also reducing emissions. Many believe that by taking the necessary steps under a less intensive voluntary emission reduction scheme, they will be better prepared if the U.S. were to eventually sign an agreement that mandated reductions in GHG emissions.

Taiyab, Nadaa. Such as wind, solar, geothermal, biomass, hydro, combined heat and power, and others. 12 Asia-Pacific Partnership on Clean Development and Climate. 13 Pew Center on Global Climate Change. 14 Interview: Duane Chapman.


The current administration’s policy to reduce GHG intensity is most advantageous in its ability to set the stage for a more stringent future. The voluntary approach is “greening” the nation, spurring technological innovation, increasing industry standards and responsibility, and developing a nationwide image of environmental stewardship. According to Stephen Eule of the Office of Climate Change Policy in the White House, the current policy “provides a costeffective ways for industries to reduce GHG emissions as responsible corporate citizens,” thus greening their image and increasing business15. Another advantage is that if mandatory reductions are required in the future, some of the participating sectors may receive credits for their previous reductions. According to Larry Mansueti, an associate of Climate VISION in the Department of Energy, “the two strongest aspects of the policy are preparation and experience.” With the education gained from this voluntary approach, national motivation can be elevated to a level where something will be accomplished on a larger scale. He also notes that enough voluntary efforts may delay the need for mandatory policy, and that the policy currently in place is spurring development of cleaner technologies that could set the stage for a mandatory program after 2012. 16 Aside from preparation, the current policy includes immediate benefits such as tax incentives for renewable energy, hybrid vehicles and deployment partnerships, USDA incentives for sequestration, and conservation of tropical forests and other land-based carbon sinks.17 Many corporations have become “green” and are engaging in a carbon trading market to help reach the goal of reducing GHG emission intensity using cost-effective technologies and strategies. The primary attraction of emissions trading is that a properly designed program provides a framework to meet emissions reduction goals at the lowest possible costs.18 Because voluntary carbon offset markets are independently designed, they are free from the stringent guidelines, lengthy paperwork, and high transaction costs, giving project developers more freedom to invest in small-scale community based projects. Moreover, because the policy is not managed at the national level, it encourages local economic development.19 Disadvantages

15 16

Interview: Stephen Eule. Interview: Larry Mansueti. 17 Marlay, Robert C. 18 Ellerman, A.D., P.L. Joskow, and D. Harrison, Jr. 19 Taiyab, Nadaa.


Although the policy is praised for some corporate advantages, it is also criticized for a lack of realistic and attainable GHG emission reductions on a national scale. First, it is uncertain that emission reductions will not occur under this policy. According to an article published in The New York Times, “the administration’s climate policy will result in emissions growing 11 percent in 2012 from 2002. In the previous decade, emissions grew at a rate of 11.6 percent, according to the Environmental Protection Agency.”20 This seems more like emissions are leveling rather than declining. Although encouraging at face value, the voluntary approach creates the image of a “rich gentleman’s club” – only for those that can afford to reduce GHG emissions. According to Cornell Professor Timothy Fahey, the voluntary approach has “no hope.” He believes the voluntary strategy may create a green image for businesses, but it doesn’t create national motivation or a sense of emergency.21 There are also criticisms of the carbon trading market that have evolved as a result of the voluntary approach; they revolve around the issues of additionality, permanence, and leakage. The source of the “carbon offset” must be new and not already in existence. For instance, if a company buys credits from a forester whose trees are already sequestering CO2, overall emissions do not decrease, so the offset is not additional. Permanence refers to the assurance that an offset will remain in working order for the length of time specified. Lastly, leakage occurs when events outside the project boundary, but related to the project, reduce the project’s carbon benefit.22 The primary disadvantage of a voluntary emissions reduction policy is the lack of regulatory pressure and competition. Instead, those sectors included in the strategy must be selfmotivated if GHG intensity reductions will occur. Moreover, most of the upfront costs, such as technology upgrades and investments, deter corporations from joining the voluntary program. In effect, the voluntary approach does not address climate change according to its actual urgency.

The European Emissions Trading Scheme
20 21

Revkin, Andrew. Interview: Timothy Fahey. 22 Taiyab, Nadaa.


The European Union Emission Trading Scheme (EU-ETS) is a GHG emission trading scheme. It was launched in 2005 as the largest multi-country, multi-sector GHG trading scheme worldwide. The scheme is based on Directive 2003/87/EC, which entered into force on 2003. This Directive aims to establish an emissions trading system to promote reductions in a costeffective and economically efficient manner. The EU-ETS has the opportunity to advance the role of market-based policies in environmental regulation and to form the basis for future international climate change policies. In the first phase (2005-2007), the EU ETS includes some 12,000 installations, representing approximately 45% of EU CO2 emissions. Although the ETS covers only CO2 emissions from four broad sectors in the first phase, the second phase (2008-2012) expands the scope by including the other GHGs. All important provision of the EU-ETS is briefly presented at the Appendix. Advantages The main advantage of emissions trading under the EU-ETS is that “firms can flexibly choose to meet their targets, rather than use predetermined technologies or standards–as in command-and-control policies.”23 This is, in fact, the advantage of any market-based environmental strategy. The flexibility provided by emissions trading makes a smooth transition possible, which is, at least theoretically, a preferred way for the regulated companies. According to economic theory, GHG emission reductions from each source are economically efficient under market equilibrium.24 Emissions sources, under this system, have low-cost reduction opportunities and can sell their additional allowances to sources where reductions would be more difficult and costly. This leads to the lowest overall cost or most economically efficient solution. The relatively low overall transaction costs under EU-ETS25 and the possibility for high volume and activity within the market26 can be seen as the factors that make the system efficient.

23 24

Pew Center on Global Climate Change, 2005, p.2 Kolstad, p.163 25 It is mainly caused by the large size of each point source. At least for beginning, there are not millions of parties to negotiate or bargain to reach an acceptable solution. The limited number of participants (around 12,000 installations for the first phase) facilitates negotiation and reduces transaction costs. 26 Pew Center on Global Climate Change, 2005, p.17


It is expected for such a market to facilitate GHG emissions reductions, make prices more competitive, and broaden the range of marginal abatement costs. Another advantage of the emissions trading scheme over pollution fees is its pressure on emission quantity. With an emission fee, “we know precisely what the marginal cost of control will be; we are less sure about the quantity of pollution;” on the other hand, in a marketable permit system “we know exactly how much pollution there will be; we are less sure of the marginal cost of control.”27 Since marginal abatement costs are uncertain and we assume they are relatively constant in relation to marginal abatement benefits, we can theoretically claim that quantity regulation (permit trading) would be better than price regulation (emission tax).28 Moreover, when the economy is experiencing inflation, the market price of pollution rights would be expected to keep pace automatically, while changing the tax rate could require a lengthy administrative procedure.29 There are different economic structures and energy use patterns among European nations, so a pollution tax system is less politically appealing. Implementation of direct pollution tax would probably make the system difficult to proceed because “many European countries are unwilling to enact a carbon tax or any other pollution taxes of a progressive nature due to their concerns about the impact of such taxes on electricity prices and the competitiveness of energyintensive local industries and dominant electric utilities.”30 As a result, the emissions trading system is the politically best solution to enforce with respect to other incentive-based solutions such as pollution fees. If penalties are greater than the permit prices, then this shows that the system will likely function efficiently. The EU Directive establishing the EU-ETS requires a violating source to pay a penalty for excess emissions of 40 Euro/CO2 in the first phase and 100 Euro/CO2 in the second phase. In addition, these firms must also proportionately reduce their emissions in the following year by this excess.31 Since these stiff penalties have been significantly higher than permit prices to date, this provision can be perceived as ideally designed.
27 28

Kolstad, p.144 There are some counter-arguments on this issue. For example, Pitzer (2002: p.432) claims that taxes are much more efficient than permits for controlling GHG emissions – by a factor of five to one. However, he assumes that marginal benefits partially a product of the assumed quadratic damage function (catastrophic outcomes due to climate change). Since his arguments cannot be tested yet (no catastrophic scenario has been realized), it is better for us to accept conventional arguments about tax and permit policies. 29 Rosen, p.97 30 Choi, p.898 31 European Parliament, Article-16, p. L 275/37


Bankable permits can increase the viability of an emission trading system. Although member states have forbidden the banking of ETS allowances from the first to the second periods, Clean Development Mechanism (CDM) credits can be banked. They are likely to be a popular hedge for the 2008-2012 trading period. This is an advantage because it facilitates GHG reductions by companies within countries with binding emission reduction targets, although there is also opposition to this strategy. The transparency in monitoring and reporting are strong enough to deter regulated companies from evading emission reductions. Under the EU-ETS system, the use of third-party certification is allowed and independent auditing is possible. Third-party certification may actually help reduce administrative costs. Although some analysts believe that third-party certification “can create a dispute over standards and methods of verification between the government and entity,”32 this is not likely a significant problem. The European Commission published a 75-page “Decision and Guidelines” that specifies methods for computing indirectly or measuring directly CO2 emissions from each of the industrial categories covered under the ETS.33 Disadvantages The EU Directive covers only CO2 emissions during Phase I. The CO2-only policy exempting other GHGs34 does not take full advantage of all the environmental and economic benefits that the comprehensive approach covering all GHGs can offer. “Other GHGs are generally more potent global warming gases than CO2. Therefore, if unaddressed, a shift to other activities that generate non-CO2 emissions could negate CO2 reduction benefits outside the trading program. For example, increased natural gas production can lead to increased emissions of methane (CH4) due to the mismanagement of gas pipeline systems.”35 Transportation is a very important sector whose emissions continue to grow strongly, despite ongoing policy measures. “EU-15 GHG emissions from domestic transport increased by 24% between 1990 and 2003. [They] are projected to increase by 31% from 1990 levels by 2010 using
32 33

Choi, p.933 Detailed information can be gathered by European Commission Decision of 29 January 2004 establishing monitoring and reporting of GHG emissions. Available at: http://ec.europa.eu/environment/climat/emission/mrg_en.htm 34 There are six principal GHGs: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfurhexafluoride (SF6). 35 Choi, p.906


existing domestic policies and measures. The average CO2 emissions of new passenger cars were reduced by about 12% from 1995 to 2003, but 16% more cars were sold in the same period, thereby [offsetting] any efficiency gains.”36 Policy implementations ignoring this sector are likely to be insufficient. Nevertheless, ETS does not cover emissions from transportation. In the EU, governmental decision-making is very complicated37 since both party and national interests are represented in policy deliberation processes. This creates a considerable challenge for preparation and approval of any legislation and can result in delays in legislation and implementation. In addition, national allocation plans (NAPs), which are prepared by all member countries for the ETS, are complex documents that promote bureaucracy. Some people fear that many member states have been overly generous with their initial allocations. There is distrust between member states, partly due to contentious negotiation processes for installation coverage. During these processes, individual country characteristics in the projection of emissions are subject to discussion. “Many ETS participants are concerned over disparate allocation methods and over the perception that each country favored certain industries over others, which could lead to adverse competitive impacts within the EU.”38 Under these circumstances, one can easily question whether the political support will be durable in the future. “If the EU-ETS results in higher than expected energy price increases and/or relative impacts on sectoral competitiveness in different member states”39, then political pressure over the national governments would likely increase. Allocation method is also as important as number of allowances for determining price levels. According to Shawhan, “one important factor for the efficiency of the system is how many allowances are allocated compared to supply of abatement. It appears in the EU-ETS there have been so many allowances ending up with very low prices. It means less abatement.”40 In the first trading period (2005-2007), at most 5% of allowances can be auctioned; in the second trading period (2008-2012), at most 10% can be auctioned.41 Although some countries (Denmark, Hungary, Ireland, and Lithuania) will conduct auctions, and others (the U.K., the

European Environment Agency, p.34 First the European Commission proposes new legislation. The European Council, where member countries are represented by their respective ministers (environment ministers in the case of the EU-ETS), and the European Parliament are co-legislators and decide the content of Directives (i.e., pass laws). Then the EU Commission ensures that all legislation is implemented properly. 38 Thompson, p.11 39 Pew Center on Global Climate Change, 2005, p.17 40 Interview: Dan Shawhan, 41 European Parliament, Article-10, p. L 275/36


Netherlands, and Portugal) intend to auction unused allowances from the new entrants reserve,42 most member countries prefer free allocation. Nevertheless, there are compelling arguments for the advantage of auctioned permits over free distribution. Auctions are cost effective solutions. The revenue raised by an auction can be used by the government to compensate a distortionary tax or to monitor compliance.43 The only serious possible problem with the auctioning scheme is that “incumbent firms might be able to buy pollution licenses in excess of the firms’ cost-minimizing requirements to deter other firms from entering the market.”44 CDM and Joint Implementation (JI) are problematic issues despite their potential contribution for emissions reduction. The baseline inventory, monitoring, and verification of claimed reductions are contentious since there is ongoing scientific uncertainty about how to measure GHG removals obtained by afforestation and reforestation projects. However, CDM can actually reduce GHG emissions accurately through clean energy technologies and energy efficiency in developing countries. As indicated by the Pew Center on Global Climate Change, “A[nother] pressing uncertainty concerns the availability of international CDM projects from developing nations. In a review of the world market for carbon credits, the World Bank estimated that in 2003, 78 MT CO 2 of credits were traded, primarily via project mechanisms. (...) Existing CDM projects have each averaged around 250,000 tons CO2 in size and so to meet projected EU-ETS demand would require around 800 projects (around 1,700 projects if additional demand from other Kyoto nations is considered). The current pace of evaluation and acceptance of projects by the CDM board raises considerable doubts that enough projects could be certified in time.”45 Due to this availability problem, the projected use of carbon sinks for achieving the EU-15 Kyoto target is so far relatively small. “The estimated removal by forestry and agricultural activities is 31 and 0.8 MT CO2 per year respectively or in total about 0.7 % in relation to the EU-15 target of – 8 %.”46 Under the ETS, each nation will have its own registry containing accounts that will hold the allowances. These registries interlink with the community transaction log, operated by the European Commission, which will record and check every transaction.47 The registry system is
42 43

Thompson, p.10 Keohane et al, p.562 44 Rosen, p.97 45 Pew Center on Global Climate Change, 2005, p.14 46 European Environment Agency, p.43 47 Thompson, p.14


difficult to administer because it aims to coordinate operations of different national registries. Its complexity may be caused by the design target to integrate this system with an international emissions trading program in the future, but this eventually will increase transaction costs.

Comparison of Approaches In response to global climate change, the United States and the European Union have taken different approaches to reducing GHG emissions. The United States’ voluntary approach differs from the European Union’s Emissions Trading Scheme in stringency of requirements, program transparency and monitoring, and overall impacts. While each approach is both criticized and applauded by different parties, each has created verified data that shows their real strength and effectiveness. The United States’ voluntary approach requires the country to voluntarily reduce its GHG intensity by 18% by the year 2012. This requirement does not require actual reductions in GHG emissions, and therefore allows for emissions to continue growing. It does, however, promote the reduction of the growth in GHG emissions. According to a recent study conducted by the White House, GHG emissions will grow by 11% above 2002 levels by the year 2012.48 Therefore, the voluntary approach is not reducing GHG emissions because it is not stringent. On the other hand, the European Union’s Emissions Trading Scheme (EU-ETS) requires mandatory reductions of CO2 emissions in three phases. The overall goal is to reduce CO2 emissions by 8% through the Emissions Trading Scheme.49 In this case, GHG emissions are being reduced, as opposed to the case in the United States, where the growth in emissions is being reduced but total emissions continue growing. The United States’ approach also has a voluntary registry for GHG emissions. In this approach, companies may choose or refuse to report their GHG emissions. On the other hand, the ETS has a mandatory registry, where companies are required to report their GHG emissions. This allows the European Union to have much more accurate data on which to make decisions, while the United States voluntary registry may not have complete data. Finally, there are different advantages to each approach. The main advantage of the voluntary approach may be that companies and sectors are receiving experience in reducing
48 49

Revkin, Andrew C.


GHG emissions and are preparing for more stringent emission reduction goals. It may also be providing improved public image to companies to increase sales. The ETS, on the other hand, have quantifiable impacts on GHG emissions and is providing incentives for a much faster transition to technologies that reduce or have lower GHG emissions. It is clear that, from a comparison of both approaches, the ETS is actually working more effectively in reducing GHG emissions while promoting economic efficiency. Recommendations The voluntary approach and the ETS both have disadvantages that prevent required reductions in GHG to occur as the science recommends. We believe that different strategies must be integrated to address GHG emissions from all sources. These strategies can focus on improving industry to reduce GHG emissions, innovating energy efficient technologies, further developing clean energy technologies, providing incentives that reduce land-use GHG emissions, emission trading and government administrative approaches, such as taxation or subsidies. Critical analysis of an emissions trading mechanism should not be only narrowed as a trading mechanism. Under trading mechanisms, there is an entire set of institutions consisting of administrative and bureaucratic approaches, including the National Allowance Plan (NAP), government taxation and subsidization, market incentives, exchanges among nations and companies, and sharing among the 25 nations in the European Union. In the case of the EU-ETS, we have found several flaws that should be corrected under a future emissions trading scheme. An emissions trading scheme should also include other sources of GHG emissions, particularly transportation. In the case of the European Union, the increase in emissions coming from transportation in the last decade has been very large. Addressing this sector in a future emissions trading scheme is highly advisable and would ensure that more sources of GHG emissions innovate to reduce emissions. Emissions trading schemes should also allow for strict monitoring and enforcement. Under the EU-ETS, monitoring has not been very effective when trading internationally. Clarifying how physical reductions will occur should be an important part of an emissions trading scheme to ensure that GHG emissions are in fact being reduced. Finally, an emissions trading scheme needs governmental commitment. If this mechanism is to be expanded to other regions of the world, governments must be committed to taking the appropriate steps to enforce real reductions in GHG emissions. 14

Despite the fact that both approaches have not been in effect for long, it is possible to extract similarities and differences. Both strategies use market-based solutions and emerged due to the specific political conditions in each region. From the analysis, it is clear that the EU-ETS seems a more promising approach as it is supported by top level governmental offices whereas no realistic impact could be seen in the US voluntary approach. With no doubt, effective government actions are typically needed to orient the market in a direction in accordance with the public interest. The effect of volunteerism is likely to be restricted by profit motives. Despite its shortcomings and limited scope, the ETS can provide important information not only for the U.S., but also for the rest of the world. The pioneering role of the EU can also be a factor to convince policy makers to take significant steps for carbon mitigation policies. On the other hand, a prospective success in U.S. programs could provide important lessons to the EU for second phase measures, and especially for the enforcements that will take place after 2012. In short, while both approaches seek to address climate change, they are not perfect and therefore teach us important lessons for future policies to reduce GHG emissions. The U.S. voluntary approach does not reduce GHG emissions, whereas the ETS only addresses part of the problem and faces many administrative and political shortcomings. A mix of market-based solutions promoted by government incentives are necessary to address climate change by improving energy efficiency, developing and deploying clean energy technologies, increasing average vehicle fuel economy, providing incentives to land-use GHG emissions sources, and instituting trading schemes that are domestic in nature. These strategies would be the next step in using market-based, efficient solutions to climate change.

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European Union’s CO2 Emissions Trading Directive and the Climate Stewardship Act. Natural Resources Journal. Vol. 45: 865-952. Climate VISION. (2006). Program Mission. U.S. Department of Energy. http://www.climatevision.gov/mission.html. Last Accessed: February 25, 2007. D’Aloia, John. (2004). New York State Department of Public Service. Power Point: NYS Stakeholder Meeting, May 2004. Department of State. (2006). Energy Needs, Clean Development, and Climate Change. U.S. Partnerships in Action. Deutch, John M., and Ernest J. Moniz. (2006). The Nuclear Option. Scientific American. Vol. 295 (3): 76-83. Duane Chapman. Professor Emeritus of Environmental Economics, AEM Department, Cornell University. Interview: February 25, 2007. Ellerman, A.D., P.L. Joskow, and D. Harrison, Jr. Emissions Tradition in the U.S. Pew Center on Global Climate Change. Environmental Protection Agency. (2007). Climate Leaders Fact Sheet. Climate Leaders Program. http://www.epa.gov/climateleaders/docs/partnership_fact_sheet.pdf. Last Accessed: February 25, 2007. Eule, Stephen. Director, Office of Climate Change Policy, U.S. Department of Energy. Interview: February 28 & March 6, 2007. European Environment Agency. (2005). Greenhouse Gas Emission Trends and Projections in Europe 2005. EEA Report, No: 8/2005. Available at: http://reports.eea.europa.eu/eea_report_2005_8/en/GHG2005.pdf European Parliament. (2003). Directive 2003/87/EC: Establishing a Scheme for GHG Emission Allowance Trading within the EU. Official Journal of the European Union. October 13, 2003. Hasselknippe, Henrik. (2007). European carbon trade worth €14.6 billion in 2006. Carbon Market Europe. Vol.6 (2): 1-2. Available at:

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