Europe's Problems Color U.S. Plans to Curb Carbon Gases

At the other end of the transmission line, companies like Kollo live with the new rules as best they can. Each day, the silicon carbide plant's managers decide what they can afford to pay for electricity, and the utility tells them how many hours are available at that price. One day last month, the firm was told it could buy only 21 hours at the price it bid, so Kollo turned off the plant for three hours. That lengthens the 10-day manufacturing cycle and, contrary to environmental goals, reduces energy efficiency.

Starting in 2008, the E.U. will probably hand out allowances based on industries' best practices. The new standards, designed to eliminate disputed historical benchmarks, should favor efficient plants rather than grandfathering emission levels from inefficient ones.

Joost Demmink, Kollo's process manager, fears that the allocations will cover only half of what Kollo needs. If that happens, Kollo could spend about $1.3 million to cover the shortfall -- more than its profit in 2006.

Similar fears grip the French cement factory in Dannes, which is owned by Holcim. Vincent Bichet, the regional director general, said the company has cut energy costs -- and carbon emissions -- by using slag from steel plants or waste dumps and by reducing the amount of an energy-intensive material called clinker in its product.

But the new competitor may still undercut Holcim, Bichet said, because it doesn't have to pay carbon-emissions costs. The E.U. cap-and-trade system has led to a "distortion of competition" he said. "I've been yelling about this. What do you want me to do? Put a plant in Mauritania or Morocco and close this one?"

There's one more irony: The Moroccan clinker may have produced more carbon dioxide than clinker made in Dannes. "This is going the wrong way from an environmental point of view," Bichet said.

Lessons From Experience

Last week, a delegation of California state officials finished an eight-day tour of European capitals to figure out how they can learn from Europe's mistakes. And a week earlier, the Senate Energy and Natural Resources Committee held a roundtable discussion with half a dozen European executives, officials and consultants to figure out how to adapt Europe's system while avoiding some problems in the translation.

An increasing number of U.S. industry leaders -- including top executives of auto companies, FedEx, General Electric and major utilities -- have joined environmentalists in backing variation of a cap-and-trade system, and the Senate bills have bipartisan support.

One key issue is how to deal with imports from countries that don't price carbon. A U.S. system that raised costs for U.S. firms would make imported goods, especially from India and China, even more competitive, adding to the trade deficit and possibly driving U.S. companies out of business. But, for now, demanding that China act on greenhouse gases is a non-starter, and waiting for Beijing could be an excuse for inaction, proponents of U.S. legislation say.

Other questions include whether emission permits should be given away or auctioned off. Should the system cover airlines and automobiles as well as factories? Should quotas be imposed when fuels are burned or when they are extracted from the ground?

"People in Washington have begun to focus on the cost of climate change," said Paul Bledsoe, strategy director at the National Commission on Energy Policy. "But it's important to recognize that legislation to mitigate climate change is going to have significant economic costs, as well."