The Wall Street Journal-20080123-EU May Raise Emissions Costs- Rule Change Would End Free Pollution Permits- Complications for Trade
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EU May Raise Emissions Costs; Rule Change Would End Free Pollution Permits; Complications for Trade
Europe is proposing hitting industry with tougher caps on greenhouse-gas emissions, intensifying talk of a global environmental trade fight.
Proposals expected to be unveiled today would tighten caps first imposed three years ago. A big change is that European governments would start charging companies for pollution permits that so far they have handed out mostly free. Analysts say the proposals would significantly raise the cost of coal-fired electricity.
Representatives of some big industries say higher regulatory costs might spur them to shift production to countries that haven't imposed limits, particularly in the developing world.
If the proposals are adopted -- which is far from clear -- they wouldn't take effect until 2013, and even then European industry is likely to fight them unless the world's other major emitters, notably the U.S. and China, put constraints on their industries too. The U.S. and China so far have declined to mandate emission cuts.
Indeed, the latest crackdown is raising the specter of a trade war over global warming. French President Nicolas Sarkozy has suggested Europe consider tariffs on energy-intensive products imported from countries that don't impose greenhouse-gas limits.
Similar bursts of carbon protectionism are bubbling up in Washington, where U.S. industry increasingly expects Congress to cap U.S. emissions in the next several years. One pending proposal, supported by a coalition of companies, unions and environmental groups, would require exporters of certain goods to the U.S. that don't reduce their emissions to buy environmental dispensations from the U.S. government. The idea is that those dispensations would raise the exporters' costs to match those of competing U.S. firms.
The Kyoto Protocol, the climate-change treaty, requires emission cuts only from industrialized countries that have ratified it. While members of the European Union have ratified Kyoto, the U.S. never did, arguing it would severely crimp the U.S. economy. China, a developing country, isn't subject to caps under the treaty, set to expire in 2012.
Under the Kyoto system, governments in the European Union give companies within their borders emission permits letting them send a certain amount of carbon dioxide into the atmosphere each year. Companies that need more permits must buy them from companies that have extras, creating a "carbon market."
European Commission officials say their new carbon proposals assume a truly global agreement would be in place by the time their new rules take effect in 2013. If not, "then we have options," says Barbara Helfferich, a commission spokeswoman. One, similar to the proposal pending in Washington, would be to require that competing industries in countries without caps meet emission-reduction targets for goods they export into Europe. That could force them to buy emission credits on the European market -- thus boosting their costs.
The proposals would need to be approved by a body of representatives of EU member countries. Among the expected proposals: that electricity producers pay for all their emission permits starting in 2013, and that more globally competitive manufacturers pay for all their permits by 2020.
Among the companies hardest hit would be RWE AG, the German utility that makes most of its power from coal. Per Lekander, an analyst at UBS in London, estimates having to buy carbon permits could reduce RWE's earnings in 2013 by an amount equal to more than half its forecast 2008 earnings.
Charging utilities for all their emission permits could make coal costlier than natural gas, "and this would have an effect on investment planning for new power stations," says Julia Scharlemann, an RWE spokeswoman.
Heavy manufacturers also are fuming. Requiring manufacturers to pay for emissions permits they are now getting free "is absolutely unacceptable if other producers in other countries have no such obligation," says Markus Weber, manager of emissions trading for ThyssenKrupp AG, the big German-based steelmaker.
But imposing tariffs on imports from countries like China would be fraught with practical problems, he says, including determining how to levy the tariff on a finished product like a car, whose parts are built in multiple countries. "You have the huge potential of massive trade conflicts," he adds.
