As Congress debates how to cut climate-warming emissions, insights drawn from the European carbon market can help. (Because of the timeliness of this issue, the editors of Scientific American decided to publish this article online in advance of its publication in the December issue.)

The odds are high that humans will warm Earth’s climate to worrisome levels during the coming century. Although fossil-fuel combustion has generated most of the buildup of climate-altering carbon dioxide (CO₂) in the atmosphere, effective solutions will require more than just designing cleaner energy sources. Equally important will be establishing institutions and strategies—particularly markets, business regulations and government policies—that provide economies with incentives to apply innovative technologies and practices that reduce emissions of CO₂ and other greenhouse gases. 

The challenge is immense. Traditional fossil-fuel energy is so abundant and inexpensive that climate-friendly substitutes have little hope of acceptance without robust policy support. Meanwhile, for nearly two decades, negotiations on binding treaties that limit global emissions have struggled. But policy makers in Europe and other regions where public concern about climate change is strongest have already implemented significant initiatives to limit release of CO₂. Lessons from these endeavors can help governments and world bodies fashion more effective strategies to protect the planet’s climate. Policy makers in the United States, which historically has produced more CO₂ emissions than any other nation while doing relatively little to tame the flow, can in particular learn much about creating viable carbon-cutting markets by studying Europe’s recent experience. Based on these insights, we offer several concrete suggestions on how the U.S. should go about constructing an effective national climate policy.

A Global Approach
Until recently, nearly all policy debate about building institutions to protect Earth’s climate focused on the global level. Successful climate policy, thought analysts, activists and politicians, hinged on signing binding international treaties because the activities that cause climate change are worldwide in scope. Such an approach was needed because conventional wisdom assumed that if national governments merely acted alone, without global coordination, industries would simply relocate to where regulation was more lax.

This globalist theory underlay the negotiation of the 1992 United Nations Framework Convention on Climate Change, which called for all countries to work in good faith to address the climate problem and created a new organization to oversee its implementation. That treaty spawned negotiations to produce more demanding agreements, leading to the 1997 Kyoto Protocol. Under Kyoto, the industrialized states—including the U.S., the European Union (E.U.), Japan and Russia—agreed in principle to individually tailored obligations that, if implemented, would have cut industrial emissions on average about five percent below 1990 levels. But developing countries, which placed a higher priority on economic growth, refused to accept caps on their emissions. They argued that responsibility for greenhouse gas pollution fell squarely on the industrialized world.

Clean Development Mechanism
Without any practical way to force developing nations to control their emissions, the Kyoto signers instead reached a compromise known as the clean development mechanism. Under this scheme, investors could earn credits for projects that cut emissions in developing nations even though the host country faced no binding restriction on its output of these gases. A British firm that faces strict (and thus costly) limits on its emissions at home, for example, might invest to build wind turbines in China. The company would then accrue credits for the difference between the “baseline” emissions that would have been released had the Chinese burned coal to generate electricity and the essentially zero emissions discharged by the wind farm. China would gain foreign investment and energy infrastructure, while the British firm could meet its environmental obligations at lower cost because credits earned overseas are often less expensive than reducing emissions at home.