The European Union initiated its Emissions Trading Scheme in 2005. This was the first large-scale such trading scheme in the world. The idea was to reduce the greenhouse emissions of Europe’s industries in a market-rational manner, and to offer the rest of the world an example of how that is done. The ETS is also known as the cap-and-trade system. That phrase suggests the good news/bad news split for markets. Bad news: there are regulatory caps on the total amount of specified gases that may be released. Good news: any particular installation can buy allowances from others to cover otherwise prohibited emissions. As a basic matter of economic theory, these allowances should be traded toward their highest and best use, ensuring that the system over all is more efficient than any command and control approach to the problem could be. Does it work? And for whom? The system has in fact drawn imitation, in both New Zealand and in Australia. In the U.S., California has its own cap-a...
