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

2
Introduction

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
Intergovernmental Panel on Climate Change.
2
Ackerman, Frank, and Stanton, Elizabeth.
3
Pew Center on Global Climate Change.
4
White House.

3
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
Department of State.
6
Department of State.
7
Climate VISION.
8
Environmental Protection Agency.
9
Taiyab, Nadaa.

4
 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.

10
Taiyab, Nadaa.
11
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.

5
 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 cost-
effective 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
Interview: Stephen Eule.
16
Interview: Larry Mansueti.
17
Marlay, Robert C.
18
Ellerman, A.D., P.L. Joskow, and D. Harrison, Jr.
19
Taiyab, Nadaa.

6
 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 self-
motivated 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

Overview

20
Revkin, Andrew.
21
Interview: Timothy Fahey.
22
Taiyab, Nadaa.

7
 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 cost-
effective 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
Pew Center on Global Climate Change, 2005, p.2
24
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

8
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 energy-
intensive 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
Kolstad, p.144
28
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

9
 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
Choi, p.933
33
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

10
 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
36
European Environment Agency, p.34
37
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

11
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
Thompson, p.10
43
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

12
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.

Discussion

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
Revkin, Andrew C.
49

13
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
Conclusion

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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