On the first day of the new year, 12,000 industrial plants across Europe began facing new limits on their carbon dioxide emissions. These plants also have begun trading emission allowances in a new carbon emissions trading market that operates somewhat like a stock exchange.
These actions are part of the European Union's effort to meet its target under the Kyoto protocol: an 8% reduction in greenhouse gas emissions from the 1990 level by 2012. The treaty will go into effect in February.
Most of the EU plants are in energy-intensive industries, such as electricity generation, steel, cement, paper, glass, and oil refining. Facilities that exceed their emission targets can pay a fine or purchase emission allowances from firms with emissions lower than their targets.
Views are mixed about whether the carbon limits will put EU companies at a large competitive disadvantage. A study conducted for the EU employers' federation, UNICE, found that economic growth would be reduced, for example, 0.48% in 2010 alone, compared with a scenario in which the Kyoto protocol is not implemented. But the European Commission, using a different set of assumptions, says the new carbon limits will reduce economic growth by less than 0.1% in 2010.
Even though the U.S. has not ratified the Kyoto protocol, some American executives believe that mandatory CO2 emissions reductions are inevitable. In 2003, a group of U.S. firms, including DuPont, Ford Motor, American Electric Power (AEP), International Paper, and Motorola, established the Chicago Climate Exchange to gain experience in buying and selling emission permits and in reducing their own emissions.
"We believe it is likely at some point in the next several years that some sort of legislation will be passed in the U.S. requiring mandatory emission reductions," says Bruce H. Braine, vice president of strategic policy analysis at AEP. "We are very interested in having a system in place for dealing with greenhouse gases," he adds.
Although European companies might be slightly disadvantaged by the carbon caps over the next few years, in the long run they will be making more money from investments in energy efficiency, says Jeff Fiedler, climate policy specialist at the Natural Resources Defense Council.
"The EU will get a head start in thinking about trading and will get a head start in developing new efficient technologies," says Neil Strachan, staff economist at the Pew Center for Global Climate Change.