The cap-and-trade system introduced by the European Union (EU) in order to comply with carbon emissions reduction targets under the United Nations Framework Convention on Climate Change Kyoto Protocol (1997) has in some instances led to the opposite outcome of the one intended. In fact, the ambitious energy and climate change policy adopted by the EU-known as the Emissions Trading Scheme (ETS)-has led to carbon leakage and in some instances to relocation or a shi in production of energy-intensive manufacturing to parts of the world where carbon reduction commitments are not in effect. EU business organizations state that corporate strategies are now directed toward expanding production overseas and reducing manufacturing capacity in the Union due to its carbon constraints. As the EU has been “going-it-alone“ with mixed success in terms of complying with the Kyoto Protocol's binding emissions reduction targets, the net outcome of the ETS market-based climate change policy is more rather than less global CO2 emissions.
Climate Change Policy in a Globalizing World
This article is a non-technical review of the economics of global policy on reducing greenhouse gas emissions. Quite a lot is known about the likely physical consequences of anthropogenic climate change, but much uncertainty remains. In particular, account needs to be taken of possible catastrophes such as ice sheet melting. How are we to balance the known costs of taking action to reduce greenhouse gas emissions in the present against the uncertain benefits of such action for future generations? How convincing is the case for substantial measures to be undertaken now? If the case for such action is accepted, should emissions be controlled via Kyoto-style national emissions targets or by the imposition of carbon taxes? How can the challenges of burden sharing between developed and developing countries be addressed?